floating exchange rates

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pages: 275 words: 77,955

Capitalism and Freedom by Milton Friedman

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affirmative action, Berlin Wall, central bank independence, Corn Laws, Deng Xiaoping, floating exchange rates, Fractional reserve banking, full employment, invisible hand, Joseph Schumpeter, liquidity trap, market friction, minimum wage unemployment, price discrimination, rent control, road to serfdom, Ronald Reagan, secular stagnation, Simon Kuznets, the market place, The Wealth of Nations by Adam Smith, union organizing

In consequence, it is unquestionably true that floating exchange rates have frequently been associated with financial and economic instability—as, for example, in hyperinflations, or severe but not hyperinflations such as have occurred in many South American countries. It is easy to conclude, as many have, that floating exchange rates produce such instability. Being in favor of floating exchange rates does not mean being in favor of unstable exchange rates. When we support a free price system at home, this does not imply that we favor a system in which prices fluctuate wildly up and down. What we want is a system in which prices are free to fluctuate but in which the forces determining them are sufficiently stable so that in fact prices move within moderate ranges. This is equally true of a system of floating exchange rates. The ultimate objective is a world in which exchange rates, while free to vary, are, in fact, highly stable because basic economic policies and conditions are stable.

A tariff, like a market price, is impersonal and does not involve direct interference by government in business affairs; a quota is likely to involve allocation and other administrative interferences, besides giving administrators valuable plums to pass out to private interests. Perhaps worse than either tariffs or quotas are extra-legal arrangements, such as the “voluntary” agreement by Japan to restrict textile exports. FLOATING EXCHANGE RATES AS THE FREE MARKET SOLUTION There are only two mechanisms that are consistent with a free market and free trade. One is a fully automatic international gold standard. This, as we saw in, the preceding chapter, is neither feasible nor desirable. In any event, we cannot adopt it by ourselves. The other is a system of freely floating exchange rates determined in the market by private transactions without governmental intervention. This is the proper free-market counterpart to the monetary rule advocated in the preceding chapter. If we do not adopt it, we shall inevitably fail to expand the area of free trade and shall sooner or later be induced to impose widespread direct controls over trade.

If so, this will only mean that other countries will be faced with the necessity of imposing controls. When, in 1950, I wrote an article proposing a system of floating exchange rates, it was in the context of European payments difficulties accompanying the then alleged “dollar shortage.” Such a turnabout is always possible. Indeed, it is the very difficulty of predicting when and how such changes occur that is the basic argument for a free market. Our problem is not to “solve” a balance of payments problem. It is to solve the balance of payments problem by adopting a mechanism that will enable free market forces to provide a prompt, effective, and automatic response to changes in conditions affecting international trade. Though freely floating exchange rates seem so clearly to be the appropriate free-market mechanism, they are strongly supported only by a fairly small number of liberals, mostly professional economists, and are opposed by many liberals who reject governmental intervention and governmental price-fixing in almost every other area.


pages: 275 words: 82,640

Money Mischief: Episodes in Monetary History by Milton Friedman

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Bretton Woods, British Empire, currency peg, double entry bookkeeping, fiat currency, financial innovation, fixed income, floating exchange rates, full employment, German hyperinflation, income per capita, law of one price, money market fund, oil shock, price anchoring, price stability, transaction costs

Marshall Plan agency, analyzing the plan for the Schuman Coal and Steel Community, the precursor to the Common Market. I concluded then that true economic unification in Europe, defined as a single relatively free market, was possible only in conjunction with a system of freely floating exchange rates. (I ruled out a unified currency on political grounds, if memory serves.) Experience since then has only strengthened my confidence in that conclusion, while also making me far more skeptical that a system of freely floating exchange rates is politically feasible. Central banks will meddle—always, of course, with the best of intentions. Nonetheless›, even dirty floating exchange rates seem to me preferable to pegged rates, though not necessarily to a unified currency. CHAPTER 10 Monetary Policy in a Fiat World We saw in chapter 2 that a world monetary system has emerged that has no historical precedent: a system in which every major currency in the world is, directly or indirectly, on an irredeemable paper money standard—directly, if the exchange rate of the currency is flexible though possibly manipulated; indirectly, if the currency is unified with another fiat-based currency (for example, since 1983, the Hong Kong dollar).

Gold continued to circulate, however, particularly on the west coast, but of course not on a one-to-one ratio with greenbacks. A free market arose in which the "greenback price of gold" rose above the official legal price—indeed, at the extreme, to more than double the official price. The government required customs duties and certain other obligations to be paid in gold; banks provided separate gold and greenback deposits for their clients. In short, gold and greenbacks circulated side by side at a floating exchange rate determined in the market, although greenbacks were clearly the dominant currency for most purposes and in most areas. Finally, we come to 1873. A movement was afoot to end the greenback episode and resume a specie standard. It was time for Congress to start tidying up the coinage legislation. The resulting Coinage Act of 1873 listed the coins to be minted. The list included gold coins and subsidiary silver coins, but it omitted the historical standard silver dollar of 371.25 troy grains of pure silver.

The silver standard was a blessing for China in the early years of the Great Depression. Thè countries it traded with were on a gold standard, and prices in those countries fell drastically after 1929, including the price of silver. With China on a silver standard, the fall in the price of silver was equivalent to a depreciation of the exchange rate of its currency with respect to gold-standard currencies; it gave China the equivalent of a floating exchange rate. For example, in 1929 the Chinese dollar was valued on the foreign exchange market at 36 U.S. cents; in the next two years the price of silver in terms of gold fell more than 40 percent, making the Chinese dollar worth only 21 cents. Since U.S. wholesale prices fell by only 26 percent, China could command higher prices in terms of its own currency for its exports, despite their lower price in terms of gold.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

No longer can the home government or central bank create more money at will. If the country runs a trade deficit, it must borrow the money from abroad. If foreign creditors demand too high an interest rate, as has happened in Greece, Portugal and Ireland, then the country faces a severe crisis; cutbacks, if not rationing, will be required. There would be no need to choose between fixed and floating exchange rates if there were a global currency that was accepted everywhere. Trade and tourism would be much easier. But the idea, akin to the spread of global languages like Esperanto, while attractive in theory, is unlikely to be adopted in practice. Governments would lose a lot of independence in monetary policy, as Europeans have discovered; capital flows would be much harder to control if a single currency was accepted worldwide, something that would upset the Chinese, for example.

Once again, it was the Americans, still at that stage a creditor nation, who led the way to a new system in which central banks acted to bring down inflation and thereby protect the interest of creditors. But the debate has evolved over the years. Go back a century and the banking establishment would have been firmly in favour of fixed exchange rates and sound money. In practice, however, the banking sector has benefited hugely from floating exchange rates, which have created a highly liquid trading market and a desire for financial products that insure against exchange-rate risk. And the abandonment of fixed exchange rates has led to a huge expansion of cross-border capital flows, from which the finance sector has taken a very large bite. The seeds of the financial crisis of 2007 – 08 were sown in the exchange-rate revolution of the early 1970s.

Economist Frank Graham wrote: We should know that we must either forgo fixed exchange rates or national monetary sovereignty if we are to avoid the disruption of equilibrium in freely conducted international trade or the system of controls and inhibitions which is the only alternative when the internal values of independent currencies deviate – as they always tend to do.4 Graham added that the system contained ‘not even the slightest provision for the adoption, by the various participating countries, of the congruent monetary policies without which a system of fixed exchange rates simply does not make sense’. In other words, countries wanted to have their cake (a fixed exchange rate) and eat it (independent monetary policy). They did not want the markets to have the ability to point out when monetary policy was incompatible with the exchange-rate target. Establishing the Bretton Woods system evoked many of the arguments that still rage today. Graham favoured floating exchange rates, but that turned out to be a policy whose time had not yet come. His arguments (and those of laissez-faire economists like Friedrich Hayek and Ludwig von Mises) were to be taken up in the 1960s and 1970s by the Chicago economists Milton Friedman and Robert Lucas. The creation of the euro owes much to the feeling – prevalent at Bretton Woods – that exchange rates should be stable and speculation curbed.


pages: 25 words: 7,179

Why Government Is the Problem by Milton Friedman

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affirmative action, Bretton Woods, floating exchange rates, invisible hand, rent control, urban renewal

It is interesting to note that every economic plank of the 1928 Socialist party platform has by now been either wholly or partly enacted. So ideas are important, but they take a long time and are not important in and of themselves. Something else has to come along that provides a fertile ground for those ideas. I mentioned the adoption of floating exchange rates in 1971; it was the same thing. Many economists during the previous twenty years had been talking about how much more desirable floating exchange rates would be, but they never got anywhere until gold started leaving the United States and Nixon closed the gold window because there was nothing else he could do. All of a sudden you had a crisis. What happened then was determined by the ideas that had already been explored and developed. I do believe that ideas have an influence, although I also believe that the accelerating inflation of the seventies was important in enabling Reagan to be elected.

If the initial reason for undertaking the activity disappears, they have a strong incentive to find another justification for its continued existence. A clear example in the international sphere is the International Monetary Fund (IMF), which was established to administer a system of fixed exchange rates. Whether that is a good system or a bad system is beside the point. In 1971, after President Nixon closed the gold window, the fixed exchange rate system collapsed and was replaced by a system of floating exchange rates. The IMF's function disappeared, yet, instead of being disbanded, it changed its function and expanded. It became a relief agency for backward countries and proceeded to dig deeper into the pockets of its sponsors to finance its new activities. At Bretton Woods, two agencies were established: one to administer a fixed exchange rate system and the other, the World Bank, to perform the function of promoting development.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

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Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

A brief review follows, but in advance two areas in particular might deserve increased attention going forward, forcing accepted explanations to be revised. One is the tendency of credit to grow excessively under a regulated centralized bank that targets inflation through interest rate setting. Another is why modern day floating exchange rates were unable to prevent the buildup of destabilizing trade and capital imbalances. Economists have gained notoriety in recent decades for linking gold to the Depression’s downturn and then crediting the revival of the late 1930s with the lessening of its use as a currency reserve, not necessarily by outright accusation but through its ability to transmit deflation globally. This being the case, the inability of today’s floating exchange rates to block the transmission of credit contraction and the deflation of asset prices (and prospectively wages and consumer prices) is a glaring counterpoint to singling out adherence to gold as a cause of poor economic performance of certain nations during that era.

Bordo is a monetarist who is of the view that a gold exchange standard is flawed because there is a “tendency for such a system to amplify and propagate the effects of unstable policies in the reservecurrency countries.”40 Schwartz partnered with Milton Friedman on his groundbreaking monetary explanation of the Depression. Although they seem to vigorously support freely floating exchange rates, they conclude in a 1988 paper looking at the economic volatility from the end of Bretton Woods (1971) that “floating rates may not provide the degree of insulation once believed,” debunking the thesis that “transmission that occurred under fixed exchange rates …was mostly prevented when exchange rates floated.”41 Their disparagement of the work of other economists studying the field of fixed and floating exchange rates and their degree of stability to the world economic system is illuminating, for it highlights the inadequacy of econometric capability: “The exercises in model building that have occupied specialists in international economics seem designed to impress readers with the ingenuity of the effort rather than the value of the analytical contribution.

The obstinance of those who did not feel the tremors of the tectonic shift away from gold is merely par for the course at such an important inflection point in the world’s cultural and monetary history, for there is a human tendency to think linearly and extrapolate. But Fisher then became a leading indicator of the intellectual mood of the 1930s. He quickly grasped reflation as a way out of the liquidity trap and, out of self-interest, his personal dilemma. Fisher helped construct a new orthodoxy that likewise has calcified academia around support for floating exchange rates, elastic currency, and the uselessness of commodity-backed currency. If the world, as Einstein proved, is circular and contains an unseen dimension, then why might not also the riddles of finance be? As we shall see in the following chapter, “Spitting into the Wind,” the Federal Reserve governors have clung to the prevailing attitudes of the Fisherian and Friedmanist school of thought. Cleansing debt through outright monetization began in 2009, but a question remains whether the Fed’s remediation will be in the correct proportion to the overindebtedness of the United States, much less the world’s.

The Future of Money by Bernard Lietaer

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agricultural Revolution, banks create money, barriers to entry, Bretton Woods, clean water, complexity theory, corporate raider, dematerialisation, discounted cash flows, diversification, fiat currency, financial deregulation, financial innovation, floating exchange rates, full employment, George Gilder, German hyperinflation, global reserve currency, Golden Gate Park, Howard Rheingold, informal economy, invention of the telephone, invention of writing, Lao Tzu, Mahatma Gandhi, means of production, microcredit, money: store of value / unit of account / medium of exchange, Norbert Wiener, North Sea oil, offshore financial centre, pattern recognition, post-industrial society, price stability, reserve currency, Ronald Reagan, seigniorage, Silicon Valley, South Sea Bubble, The Future of Employment, the market place, the payments system, trade route, transaction costs, trickle-down economics, working poor

Today, all the combined reserves of all the central banks together (about US$1.3 trillion, including about $340 billion in central bank gold, valued at current market prices) would be gobbled up in less than one day of normal trading. Compare this with the situation as recently as 1983 (see Figure P.7), when the reserves still provided a pretty safe cushion. Even people who profit from explosive speculative activity are becoming seriously worried. For instance George Sores, widely considered one of the biggest players in this game, states: 'Freely floating exchange rates are inherently unstable; moreover, the instability is cumulative so that the eventual breakdown of a freely floating exchange rate system is virtually assured. Joel Kurtzman, business editor of The New York Times, is even more damning. He titles his latest book The Death of Money: How the Electronic Economy has destabilised the World’s Markets. A master of understatement like Paul Volcker, ex-governor of the Federal Reserve, goes on record to express his concern about the growth of 'a constituency in favour of instability', i.e. financial interests whose profits depend on increased volatility.

‘Fiat' currency: A currency created out of nothing by the power of an authority. Ah national currencies are fiat currencies. Fired Ercbnnge Rnte: Rate fixed by an authority at which one currency can be exchanged against another. This was the rule in the Bretton Woods Agreement from 1945 to 1971, and the IMF was the authority, which had to approve any, changes in exchange rates. The rule of fixed exchange rates was replaced by floating exchange rates after 1972 for most national currencies. Floating Exchange Rate: Rate at which one currency can be exchanged for another as determined by the free bidding and asking in the foreign exchange market. Has been the regime for most national currencies since 1972. Fractional Reserves: When a currency is issued with only a fraction backed by whatever supports it. The practice of fractional reserves initiated in mediaeval goldsmiths' practices when they issued paper currency, which was backed by the deposits in gold made by clients.

They have therefore created the Time Dollars necessary for their transaction by agreeing on the transaction itself. The main advantage of mutual credit systems is that they self-regulate to have always currency available in sufficiency. Negotiated exchange rate: In contrast with ‘fixed exchange rates', when the exchange rate is negotiated as part of the transaction itself. Currently under floating exchange rates, all national currencies have negotiated exchange rates among each other. Similarly with ROCS the value of one hourly service is negotiated at the moment of a transaction: a dentist may charge five ROCS for each hour of work for example. OECD: The Organisation of Economic Co-operation and Development, based in Paris, and grouping the 'developed' countries in the world. Website http://www.oecd.org Payment system: Procedure and infrastructure by which the transfer of a currency is executed from one person to another.


pages: 162 words: 51,473

The Accidental Theorist: And Other Dispatches From the Dismal Science by Paul Krugman

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Bonfire of the Vanities, Bretton Woods, clean water, collective bargaining, computerized trading, corporate raider, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, Kenneth Arrow, knowledge economy, life extension, lump of labour, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor, zero-sum game

The result was right out of the textbook: an explosion of inflation, which was brought under control only by a return to double-digit unemployment rates. Moreover, how can you discuss globalization without noticing that the U.S. has a floating exchange rate? If the Fed were to pursue a radically more expansionary monetary policy, one sure consequence would be a lower value of the dollar. If you really think that U.S. prices are basically limited by foreign competition, then you have to believe that a fall in the dollar will translate almost directly into higher inflation. In fact, traditional analyses of inflation in trading economies conclude that expansionary monetary policy has more, not less, effect on inflation in a country with a large import share and a floating exchange rate than it does in a relatively self-sufficient economy. So neither productivity growth nor globalization make sense as arguments for looser monetary policy.

Or will the market be subject to alternating bouts of irrational exuberance (to borrow Alan Greenspan’s famous phrase) and unjustified pessimism? The answers one might give to these questions define four boxes, all of which have their adherents. Here is the matrix: Is exchange rate flexibility useful? No Yes Can the forex market be trusted? Yes Relaxed guy Serene floater No Determined fixer Nervous wreck Suppose that you believe that the policy freedom a country gains from a floating exchange rate is actually worth very little, but you also trust the foreign exchange market not to do anything silly. Then you will be a very relaxed guy: You will not much care what regime is chosen for the exchange rate. You may have a small preference for a fixed rate or better yet a common currency, on the grounds that stable exchange rates reduce the costs of doing business; but you will not lose sleep over the choice.


pages: 710 words: 164,527

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

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activist fund / activist shareholder / activist investor, Albert Einstein, Asian financial crisis, banks create money, Bretton Woods, British Empire, capital controls, currency manipulation / currency intervention, currency peg, deindustrialization, European colonialism, facts on the ground, fiat currency, financial independence, floating exchange rates, full employment, global reserve currency, imperial preference, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, margin call, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, New Journalism, open economy, Paul Samuelson, Potemkin village, price mechanism, price stability, psychological pricing, reserve currency, road to serfdom, seigniorage, South China Sea, special drawing rights, The Great Moderation, the market place, trade liberalization, Works Progress Administration

In particular, the gold standard—and with it, indelibly fixed exchange rates—seemed as natural to people then as it seems strange to them now. The issue of replacing the gold standard with something else was as difficult and fraught as the issue of replacing the dollar globally today. Even a thinker as radical and creative as Keynes never made a total break with it. The extreme of purely floating exchange rates, such as the world has known since 1971, was considered by few economists in the ’30s (Lionel Robbins being a notable exception) to be a “system” as such, helping to restore equilibrium. Today associated with laissez-faire economics, floating exchange rates were then frowned upon by economists of the right as well as the left as both symptom and cause of disorder in monetary affairs; disorder that triggered others to initiate mutually destructive competitive responses. Keynes thought of freely floating rates as a sort of blind groping necessitated by the collapse of the gold standard, and certainly not as a viable alternative model for underpinning trade relations among nations.

Yet when Chancellor of the Exchequer Winston Churchill made the fateful decision to return Britain to the gold standard at the prewar rate on April 28, 1925, Keynes shifted gears again and blasted the principle of committing to any parity. “I hold that in modern conditions,” he wrote in a letter to The Times of London on August 1, “wages in this country are, for various reasons, so rigid over short periods, that it is impracticable to adjust them to the ebb and flow of international gold-credit, and I would deliberately utilise fluctuations in the exchange as the shock-absorber.” Though this might appear a defense of floating exchange rates, he would far more often than not in his career defend the desirability of “stable” rates. This continuous finessing of so fundamental an issue in monetary management would flummox his supporters and enervate his detractors. Simultaneous with his Times letter Keynes published The Economic Consequences of Mr. Churchill, playing on the commercial success of his earlier attack on the Versailles Treaty.

A Bretton Woods agreement to stabilize exchange rates at that time “would definitely have made a considerable contribution to checking the war and possibly it might even have prevented it,” White said. The United States now had the most to gain from adoption of the proposals, not because it would need assistance from the fund or the bank but because it would “get assurance that other countries will be enabled to pursue monetary credit and trade policies that we regard as essential for a high level of world trade.” Floating exchange rates during White’s time at the Treasury were anathema to powerful U.S. commercial interests—large exporters and domestic producers—owing to upward pressure on the dollar. Foreign currencies falling against the dollar tended to depress U.S. exports and fuel imports competitive with American-made goods. But Britain, the world’s largest international debtor nation, was deeply concerned with being compelled by the United States to stabilize the pound at what might be an overvalued exchange rate.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

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Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

The value of a currency depends heavily on how its purchasing power is sustained at home, which in turn has to do with productivity (the more efficient business is, the less costs rise), inflation (faster-rising prices eat away at a currency’s purchasing power), government deficits (a government may be tempted to finance them by printing money), and private saving (the less a country saves, the more it imports). Exchange rates work the way other prices do: they move up or down to restore balance. If one country’s inflation is too high or it consumes too much and produces too little, its currency will decline to bring its costs back in line or force it to import less and save more. As chaotic as floating exchange rates (currencies that fluctuate against one another) are, they thus serve a vital economic purpose: they allow separate economic cultures to coexist. Milton Friedman compared floating exchange rates to daylight saving time: Isn’t it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits? All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have each individual separately change his pattern of reaction to the clock, even though all want to do so.

In the early 1990s Mexico, as it had in the 1970s and 1980s, borrowed heavily from foreigners, this time in the form of short-term Treasury bills whose value was linked to the dollar rather than via bank loans. When the peso collapsed in 1994, the cost of servicing that debt soared, and the United States and International Monetary Fund bailed Mexico out. Mexico learned its lesson, and thereafter kept a floating exchange rate and stuck to borrowing in its own currency. When the rich world sank into crisis in 2008, Mexico’s central banker observed, with relief, “This time it wasn’t us.” Individual firms learned lessons, as well. While almost forgotten now, the collapse in 1990 of Drexel Burnham Lambert, home of the junk bond king Michael Milken, was the largest closure of an investment bank in the United States.

They can no more imagine themselves responsible for the harm this inflicts on others than a driver who hits his brakes too hard takes responsibility for the driver who follows too close behind. A similar problem afflicts the entire global economy. The crisis that befell America was in its own way the product of too much saving in other parts of the world. Indeed, this could be traced to the roots of a previous crisis, in East Asia, which was itself the result of a failed effort to eliminate the uncertainty of floating exchange rates. Thailand entered the 1980s suffering from double-digit inflation, excessive private borrowing, and a gaping budget deficit. It put in place several strict policies to restore health, among them fixing the exchange rate of its currency, the baht. That stable exchange rate made foreign investors less worried about lending to Thai companies in local currency, believing that when the Thai borrower repaid the money, it would not have lost value because of a devaluation.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Any loss of competitiveness in one country, as a result of higher inflation than in its trading partners, was assumed to be temporary and would be met by a deflationary policy to restore competitiveness while borrowing from the IMF to finance a short-term trade deficit. But in the late 1960s differences in inflation across countries, especially between the United States and Germany, appeared to be more than temporary, and led to the breakdown of the Bretton Woods system in 1970–1. By the early 1970s, the major economies had moved to a system of ‘floating’ exchange rates, in which currency values are determined by private sector supply and demand in the markets for foreign exchange. Inevitably, the early days of floating exchange rates reduced the discipline on countries to pursue low inflation. When the two oil shocks of the 1970s – in 1973, when an embargo by Arab countries led to a quadrupling of prices, and 1979, when prices doubled after disruption to supply following the Iranian Revolution – hit the western world, the result was the Great Inflation, with annual inflation reaching 13 per cent in the United States and 27 per cent in the United Kingdom.7 Economic experiments From the late 1970s onwards, the western world then embarked on what we can now see were three bold experiments to manage money, exchange rates and the banking system better.

So the euro area must pursue one, or some combination of, the following four ways forward: Continue with high unemployment in the periphery countries until wages and prices have fallen enough to restore the loss in competitiveness. Since the full-employment trade deficits of these countries are still significant, further reductions will be painful to achieve. Unemployment is already at very high levels in these countries. In small countries, for which a floating exchange rate may seem too risky, such a route may be the only option. Create a period of high inflation in Germany and other countries in surplus, while restraining wages and prices in the periphery, to eliminate the differences in competitiveness between north and south. That would require a marked fall in the euro for a long period, which would be unpopular in both Germany, whose savers would earn an even lower return on their assets than at present, and the rest of the world, which would interpret the fall as a hostile move.

Enlightened self-interest to find a way back to the path of strong growth is the only hope. The aim should be fourfold: to reinvigorate the IMF and reinforce its legitimacy by reforms to its voting system, including an end to a veto by any one country; to put in place a permanent system of swap agreements among central banks, under which they can quickly lend to each other in whichever currencies are needed to meet short-term shortages of liquidity; to accept floating exchange rates; and to agree on a timetable for rebalancing of major economies, and a return to normal real interest rates, with the IMF as the custodian of the process. The leadership of the IMF must raise its game. The two main threats to the world economy today are the continuing disequilibrium between spending and saving, both within and between major economies, and a return to a multipolar world with similarities to the unstable position before the First World War.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

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Asian financial crisis, banking crisis, Bretton Woods, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

Addressing these issues should be an integral part of a new economic model, including requirements for more transparent reporting (including on hedge funds and other private investment vehicles), greater shareholder power and more restrictions on how executives are compensated. The system also favors debt. Closer oversight of credit standards is required. Similarly, the international flow of hot capital has upended theories about the system of floating exchange rates. The fact that America’s dollar stays high despite a huge trade deficit is not self-correcting. As Robert Wade of the London School of Economics argues, some intelligent combination of semi-pegged currencies and capital-flow restraint would go miles toward rebalancing the international economy. The mainstream Democratic model is at best outdated; at worst, it never worked. Wages can surely rise too rapidly and contribute to destabilizing inflation, as occurred in the 1970s.

When in 1971 the Nixon administration was faced with the choice of increasing taxes to finance the Vietnam War or abandoning the Bretton Woods fixed-exchange-rate system that delivered pre-dictability and less risk in international financial relationships, it had no hesitation. The markets would do the job instead—and if other governments did not like the new risks, tough. For a long time, it looked as though private markets could step into the breach—recycling first petrodollars in the 1970s and then Asian dollars back into the global system. Floating exchange rates were volatile, but instruments like markets in future exchange rates emerged to manage new risks. There might be serious ruptures, like the 1980s Latin American debt crisis or the 1990s Asian financial crisis when private markets took fright, but basically governments could step away from global economic management. The U.S. could have guns, butter and allow its great multinationals and banks to expand abroad willy-nilly—and the markets would manage the implications spontaneously, finding the capital the U.S. needed with no constraint on either its government or financial system.

I would like the U.S. to consider going back to Bretton Woods basics—unfashionable though it may seem. It was not just Lyndon B. Johnson who opened the way to the Republicans’ “Southern Strategy” and nearly 40 years of conservative dominance: It was also Nixon’s abandonment of government-led economic disciplines through his suspension of Bretton Woods fixed exchange rates. Obama should propose the end of floating exchange rates and argue for a system of managed rates between the euro, dollar and yen to bring back more pre-dictability into the system. The American, EU and Japanese governments would undertake, as in Bretton Woods I, whatever economic action is needed to maintain stability between their exchange rates. There would also be explicit rules on exchange rate rigging—a more effective way of tackling the China issue than threatening it with tariffs.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Even here, a narrative is attached to the rating, which is unraveled whenever the rating shifts, or when various ratings agencies offer different grades for a particular financial product. 42 Bretton Woods refers to the international monetary system that was established in 1944, wherein countries agreed to adopt monetary policies aimed to ensure that their currencies maintained fixed rates of exchange against the U.S. dollar, which was in turn “pegged” to gold. After a series of difficulties during the 1960s, the system finally broke down in 1973, when a system of “floating” exchange rates was adopted. President Nixon’s decision to suspend the dollar’s convertibility into gold in 1971—known as the “Nixon shock”—was a major step toward this breakdown. 43 It was Bourdieu who accused Hans Tietmeyer, then President of the Bundesbank, of perpetuating a “monetarist religion” (see Tognato 2012: 135). 44 Issing was a key figure in the euro’s design and a founding member of the executive board of the European Central Bank. 2 CAPITAL This boundless drive for enrichment, this passionate chase after value, is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser.

In other words, the burden of devaluation shifts from private capital onto money, as private problems (money’s particularism) are transposed into public ones (money’s universalism) (Harvey 2006: 310). It is at the top of the hierarchy of monetary institutions that the fundamental question of money’s value must always be defended. It is on this level, moreover, that capitalist crises take on an international dimension through money. After the collapse of Bretton Woods, states with floating exchange rates were competing to determine which of them bear the brunt of devaluation. Alternatively, in the aftermath of the 2007–8 banking crisis, periodic “currency wars” have ensued as states seek to boost export-led growth by devaluing their currencies. For Harvey, the increasing involvement of the state in the economy since Marx’s time is not a refutation of his basic law of value. Rather, it provides evidence that such a law is moving toward a kind of perfection.

As we have already discussed, when the underlying value of money is put in question, the ramifications extend from the top to the bottom of the monetary hierarchy: from the institutions responsible for the governance of world money, to the workers, consumers, and pensioners whose very livelihoods are put at stake by the dynamics of inflation and deflation. Harvey cites Roosevelt’s New Deal as one major example of these forces at work. Two more recent instances that I want to discuss here are the aftermath of the collapse of the Bretton Woods regime, which saw major struggles between capital and labor being waged against the background of a new international regime of floating exchange rates, and the ongoing crisis within the Eurozone, whose devastating effect across classes and generations is still being played out. One of the classic analyses of the Bretton Woods crisis from the perspective of Marx’s theory of money and credit was advanced by Christian Marazzi in his 1976 paper, “Money in the World Crisis” (Marazzi 1995). Marazzi, an economist, is one of several Marxist thinkers who explored the theoretical implications of post-Fordism (Marazzi 2008, 2010).


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

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Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, labour mobility, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game

There was nothing left for it but to move all of the major currencies to a floating rate system. Finally, in 1973, the IMF declared the Bretton Woods system dead, officially ended the role of gold in international finance and left currency values to fluctuate against one another at whatever level governments or the markets desired. One currency era had ended and another had now begun, but the currency war was far from over. The age of floating exchange rates, beginning in 1973, combined with the demise of the dollar link to gold put a temporary end to the devaluation dramas that had occupied international monetary affairs since the 1920s. No longer would central bankers and finance ministries anguish over breaking a parity or abandoning gold. Now markets moved currencies up or down on a daily basis as they saw fit. Governments did intervene in markets from time to time to offset what they saw as excesses or disorderly conditions, but this was usually of limited and temporary effect.

In the 1950s and 1960s, it had provided bridge loans to countries suffering temporary balance of payments difficulties to allow them to maintain their currency peg to the dollar. In the 1980s and 1990s it had assisted developing economies suffering foreign exchange crises by providing finance conditioned upon austerity measures designed to protect foreign bankers and bondholders. Yet with the elimination of gold, the rise of floating exchange rates and the piling up of huge surpluses by developing countries, the IMF entered the twenty-first century with no discernable mission. Suddenly the G20 breathed new life into the IMF by positioning it as a kind of Bank of the G20 or proto–world central bank. Its ambitious leader at the time, Dominique Strauss-Kahn, could not have been more pleased, and he eagerly set about as the global referee for whatever guidelines the G20 might set.

bank regulation Board of Governors on classical gold standard in creating a new gold-backed system creation of current assets of Dodd-Frank reform legislation of 2010 and and dollar price stability gold and money supply during 1930s gold and money supply in 2011 handling of its own balance sheet and IMF IOUs to the Treasury as lender of last resort and management of unemployment mandates of mercantilism compared to and monetarism quantitative easing program Financial Crisis Inquiry Commission financial economics financial war game financial warfare strategy First National Bank of New York First National City Bank of New York fixed exchange rates floating exchange rates, 1970s Fort Knox, Kentucky Foundations of Economic Analysis (Samuelson) fractal dimension framing, in economics France currency collapse in 1920s and European sovereign debt crisis of 2010 gold reserves and gold standard invasion of Germany’s Ruhr Valley Paris Peace Conference of 1919 Treaty of Versailles and Tripartite Agreement of 1936 withdrawal from London Gold Pool free-floating currency free trade barriers Friedman, Milton Gallarotti, Giulio M.

Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano

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banking crisis, banks create money, barriers to entry, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, fixed income, floating exchange rates, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, old-boy network, open economy, pension reform, price stability, rent-seeking, school vouchers, seigniorage, trade liberalization, women in the workforce

Although exchange-rate regime harmonization among its member countries is not practiced in the CAN, and monetary integration is still not on their agenda, the fact is that Ecuador’s new monetary system adds to the already large variety of exchange-regimes in the Andean region. At present (mid-2002) we have floating exchange-rate regimes in Peru, Colombia, and República Bolivariana de Venezuela, a crawling peg system in Bolivia, and a foreign-currency regime in Ecuador. The fact that two trade partners (and neighboring countries) of Ecuador—Peru and Colombia—are in a floating exchange-rate regime while Ecuador is dollarized creates the potential for Ecuador to lose regional competitiveness, should these countries depreciate their currencies, an option unavailable to Ecuador. In the context of MERCOSUR (Mercado Común del Sur) countries, this is what exactly happened to Argentina when Brazil sharply devalued its national currency, the real, in early 1999, causing Argentina to suffer an important loss of competitiveness.

Real growth, inflation, exchange-rate depreciation, and the public deficit remained highly unstable. Under León Febres Cordero’s liberalizing government, which took office in August 1984, real GDP rebounded, growing 4.2 and 4.3 percent in 1984 and 1985, respectively, while inflation moderated to around 20 percent. In 1986, however, at the same time it began liberalizing commercial-bank interest rates, the government began a floating exchange rate for privatesector imports. Oil-export prices fell by more than half that year, how- LONGER-TERM ORIGINS OF ECUADOR’S “PREDOLLARIZATION” CRISIS 29 Table 2.1 Ecuador: Governments, 1979–2001 Period President Aug 79–May 81 May 81–Aug 84 Jaime Roldós Osvaldo Hurtado Aug 84–Aug 88 Aug 88–Aug 92 Aug 92–Aug 96 Aug 96–Feb 97 León Febres Cordero Rodrigo Borja Sixto Durán Ballén Abdalá Bucaram Feb 97–Aug 98 Fabián Alarcón Aug 98–Jan 00 Jan 00– Jamil Mahuad Gustavo Noboa Acceded to office through Election Vice President, assumed office Election Election Election Designation by Congress Election Vice President, assumed office Departure from office Accidental death Term concluded Term concluded Term concluded Term concluded Removed by Congress Term concluded Resigned ever, and in January 1987 the government suspended debt service to commercial banks.


pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

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affirmative action, banking crisis, Berlin Wall, Bretton Woods, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Arrow, labour market flexibility, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Ponzi scheme, price stability, rent control, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thorstein Veblen, zero-sum game

Yet few industries rely so heavily on special government favors.6 Changes in monetary growth affect the economy only slowly—it may be six or twelve or eighteen months or even more before their effects are manifest.7 Inflation is always and everywhere a monetary phenomenon.8 From the 1940s to 2006, Friedman put forward a bevy of public policy proposals, many of which have at least to some extent been implemented or considered—this can be said of very few individuals. Daniel Patrick Moynihan remarked in 1971: “If you were to ask me to name the most creative social-political thinker of our age I would not hesitate to say Milton Friedman.”9 Starting in the 1940s, Friedman put forward the idea of floating exchange rates, which were implemented in the United States in the early 1970s. In the 1950s, he developed his idea of a fixed expansion of the money supply each year. Although this policy proposal had only mixed success, his general emphasis that the way to limit inflation is to limit increases in the supply of money became the accepted opinion in the late 1970s to early 1980s. In Capitalism and Freedom, he identifies fourteen “activities currently undertaken by government” in the United States that cannot, in his mind, “validly be justified”: 1.

Friedman was one of the committee members. After the 1968 election but before Nixon was inaugurated, Friedman met with him in New York, giving the president-elect a memorandum recommending flexible exchange rates, which Friedman had long advocated. He wrote in Newsweek the year before: “We should set the dollar free and let its price in terms of other currencies be determined by private dealings. Such a system of floating exchange rates would eliminate the balance of payments problem... and informal exchange controls, and [would allow the ability] to move unilaterally toward freer trade.”2 A negative balance of payments, or trade deficit, was much more of a problem in a system of fixed exchange rates than in one of market-determined exchange rates, because under the latter system, there is no loss of national government financial reserves when there is a trade deficit in order to maintain a currency’s value.

It has benefited most from the euro by having been able to get the euro interest rate instead of what otherwise would have been its own. That would be much higher because Italy has been accumulating so much debt. In the past, Italy has inflated away its debt. The virtue of the euro is that Italy can’t do it alone. A tight ECB policy wouldn’t permit that to happen again. In this sense, the euro is good for Europe. But only if there is flexibility all around. The problem is that, in a world of floating exchange rates, as Italy was before the euro, if one country is subjected to a shock which requires it to cut wages, it cannot do so with a modern kind of control and regulation system. It is much easier to do it by letting the exchange rate change. Only one price has to change, instead of many. But now, in the euro, that option is taken away. The only alternative if a state has to adjust to a shock is to let internal prices vary.


pages: 275 words: 84,980

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives) by David Birch

agricultural Revolution, Airbnb, bank run, banks create money, bitcoin, blockchain, Bretton Woods, British Empire, Broken windows theory, Burning Man, capital controls, cashless society, Clayton Christensen, clockwork universe, creative destruction, credit crunch, cross-subsidies, crowdsourcing, cryptocurrency, David Graeber, dematerialisation, Diane Coyle, distributed ledger, double entry bookkeeping, ethereum blockchain, facts on the ground, fault tolerance, fiat currency, financial exclusion, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, index card, informal economy, Internet of things, invention of the printing press, invention of the telegraph, invention of the telephone, invisible hand, Irish bank strikes, Isaac Newton, Jane Jacobs, Kenneth Rogoff, knowledge economy, Kuwabatake Sanjuro: assassination market, large denomination, M-Pesa, market clearing, market fundamentalism, Marshall McLuhan, Martin Wolf, mobile money, money: store of value / unit of account / medium of exchange, new economy, Northern Rock, Pingit, prediction markets, price stability, QR code, quantitative easing, railway mania, Ralph Waldo Emerson, Real Time Gross Settlement, reserve currency, Satoshi Nakamoto, seigniorage, Silicon Valley, smart contracts, social graph, special drawing rights, technoutopianism, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, wage slave, Washington Consensus, wikimedia commons

Henry hoped the people wouldn’t notice but, of course, they did, and this ‘bad money’ drove out the pure silver shillings then in circulation because people kept the good shillings as a store of value and used the bad shillings as a medium of exchange in the marketplace, thereby damaging commerce for many years until Good Queen Bess called in the debased coinage, melted it down, separated out the copper and reissued a pure silver coinage. This episode led Sir Thomas to derive his eponymous maxim: ‘bad money drives out good’ (although it should be noted that he was far from the first person to understand the principle). It might be more accurately rendered as ‘bad money drives out good money at fixed exchange rates’, since at floating exchange rates the market will simply adjust: thus, one Zimbabwean dollar used to be worth considerably less then one World of Warcraft gold piece. If an economically illiterate dictator (in Zimbabwe, for example) had set the exchange rate between Zimbabwean dollars and gold pieces at one-to-one, then sane citizens would offload all their dollars for worthless trinkets as soon as possible while hanging on to their gold pieces.

This market continued to grow long after the end of convertibility, incidentally, and by 1994 the ‘eurodollar contract’ that gave the purchaser the obligation to borrow $1 million in London in three months’ time was the most heavily traded financial instrument in the world (Mayer 1998b). The drain on the American reserves simply could not continue. In 1971, when Richard Nixon made the famous decision to end the convertibility of the US dollar into gold, we entered the world of fiat currency, floating exchange rates, computers, global telecommunications and global trading. In March 1973 the European countries that were still tied to the US dollar announced that they would sever the link, bringing the Bretton Woods system to an end. In 1973, then, one economic era ended and another began (Conway 2014b). We arrived at the point where the Bank of England backs its notes not with gold bars but with fixed-interest instruments bought from the British government (and remits the interest earned to the Treasury).

In a world in which people will only willingly hold a handful of fiat currencies (US dollars, sterling, euros, Swiss francs and so on) in lieu of gold, the mythology tying money to sovereignty is, as Steil says, ‘costly and sometimes dangerous’. He goes on to say: Monetary nationalism is simply incompatible with globalization. It has always been, even if this has only become apparent since the 1970s, when all the world’s governments rendered their currencies intrinsically worthless. I strongly agree with Steil’s view that the era of floating exchange rates between nation-state-based fiat currencies is a historical ‘blip’ that won’t be part of the future of money (Steil 2007a). I think a reactionary reset to digital gold is unlikely, though, because of the wider spectrum of alternatives that will be enabled through new technology. I hope to persuade you of this in Part III. * * * ******** Keynes’s aim was to devise a scheme that made this adjustment equal: where those countries that have built up large surpluses by exporting their goods around the world will be just as responsible for reducing the imbalance as the debtor countries that imported goods from them.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game

While detaching the dollar from gold decreased one set of perceived restrictions on the US (the threat of some countries choosing gold over dollars), it at the same time expanded not only the international status but the responsibilities of the Federal Reserve and the US Treasury. What was essentially happening was a transition from the fixed exchange rates designed to foster capitalist reconstruction under the Marshall Plan and the European Payments Union, to the establishment of the legal, institutional and market infrastructure that would sustain capitalist globalization amid floating exchange rates anchored by a US dollar– Treasury bill standard. As President Ford’s Treasury secretary, William Simon, put it when the IMF finally ratified the new monetary order (five years after the fact): This is of major interest to the United States, not only because gold is an inherently unstable basis for the monetary system but because it is inevitably linked to a fixed exchange rate system.

As Paul Volcker noted, “traders and investors were reminded that the United States, after all, was still a relative bastion of strength and stability and a safe haven in troubled times.”46 The lead taken by the Treasury and Fed in preventing bank failures during this period from turning into an international financial conflagration also goes very far to explaining why, despite all the initial fears that the move to floating exchange rates would undermine the financing of world trade, an internal Treasury memorandum was able to note in 1976 that “businessmen have found that the difficulties of operating under floating rates were not as great as many of them had anticipated.”47 The pragmatic, tentative, and uncertain steps the US had taken in approaching the decision to go off gold were replicated in successive rounds of G10 and IMF meetings to attempt to revive a fixed exchange rate system.

When Volcker proposed during the IMF’s Interim Committee negotiations in 1972 that an “indicator system” be adopted, “whereby a country’s deviation from an established norm of international reserves would trigger application of ‘graduated pressures’ on the offending country to impel it to take the necessary steps towards adjustment, European participants objected to the automaticity implied in the plan . . . [They] were unwilling to accept automatic interference in their own policies.”48 Thus, when in early 1973 the US prevailed on the Japanese and European states to embrace a system of floating exchange rates, this decision, as Volcker put it, “was not taken out of any general conviction that it was a preferred system. It was simply a last resort when, by general assent, the effort to maintain par values or central rates seemed too difficult in the face of speculative movements of capital across the world’s exchanges.”49 Just as Volcker also explains the US imposition of an import surcharge in August 1971 as a bargaining counter to secure currency revaluation and agricultural tariff reductions from the Europeans (a tactic that would again and again be deployed as part and parcel of the US push for “free trade”),50 so were the Europeans’ calls for capital controls mainly tactical.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

Other countries got stiffed as America paid its bills in dollars of diminishing value. The Bretton Woods deal included a gold window, where dollar claims could be converted, but the United States lacked the gold. So, over a weekend, with no consultations, the United States blew up the Bretton Woods system, closing the gold window. This kicked off the Great Inflation, and it ushered in an era of floating exchange rates that we are still living with today. OPEC, an attempt by oil producers to use cartel tactics to raise the price of their commodity (priced in dollars) in nominal terms to make up for the fall in the real value of the dollar, was a key side effect. The OPEC price hikes stuck, despite the fact that many countries could not afford them. To a large extent, this was made possible because the oil producers could do little with their dollars except deposit them in the American banks.

Once interest rates were deregulated, how banks funded themselves in the market and, especially, what degree of mismatch between loans and funding they were willing to risk, became an important way of making higher profits. Treasury became a “profit center,” not a utility function, in the largest banks. Trading income was also scarce before the collapse of Bretton Woods created a world of floating exchange rates. The value of any currency vs. any other currency became a second-to-second market determination. Interbank trading of foreign exchange became one of the largest markets in the world, and remains such, with trillions turning over every day. Again, a new profit center for the largest banks was born. Although the real commercial needs of customers were at the bottom of all this activity, most bank trading desks were mainly engaged in proprietary trading, betting the bank’s own capital.


pages: 218 words: 63,471

How We Got Here: A Slightly Irreverent History of Technology and Markets by Andy Kessler

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Albert Einstein, Andy Kessler, automated trading system, bank run, Big bang: deregulation of the City of London, Bob Noyce, Bretton Woods, British Empire, buttonwood tree, Claude Shannon: information theory, Corn Laws, Douglas Engelbart, Edward Lloyd's coffeehouse, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, Grace Hopper, invention of the steam engine, invention of the telephone, invisible hand, Isaac Newton, Jacquard loom, Jacquard loom, James Hargreaves, James Watt: steam engine, John von Neumann, joint-stock company, joint-stock limited liability company, Joseph-Marie Jacquard, Leonard Kleinrock, Marc Andreessen, Maui Hawaii, Menlo Park, Metcalfe's law, Metcalfe’s law, packet switching, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, railway mania, RAND corporation, Robert Metcalfe, Silicon Valley, Small Order Execution System, South Sea Bubble, spice trade, spinning jenny, Steve Jobs, supply-chain management, supply-chain management software, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, Turing machine, Turing test, William Shockley: the traitorous eight

If wages had been held relatively constant and the exchange rate of money into gold allowed to float (like today), then workers would not have been as disaffected. In an uncompetitive country, instead of wages going down, the value of the currency would drop, import prices rise, and the blame laid on the foreigners for increasing prices. The flip side would have worked well for England. With a rising currency from a floating exchange rate, products like textiles would have gotten cheaper in both England and foreign markets, but not quite as cheap. So what? The market would still grow. National wealth would be created from a rising currency and money supply could grow at its natural Real Bills rate, rather than be affected by too much gold. Rather than lowering wages and disenfranchising their customers, the British should have been working on ways to increase the wealth of all these other countries, because they were the end markets for the goods.

It took another seven years to get back on the gold standard. A guy named Churchill put England back on the gold in 1925, at the pre-War exchange rate. Heck, it was still Isaac Newton’s rate. Big mistake. It overpriced the pound, which got dumped, and gold quickly flowed out of the country. Banks had 166 HOW WE GOT HERE restricted money supply and England went into a nasty recession, a loud advertisement for floating exchange rates. By 1928, the rest of the world went back on the gold standard, but not for long. Following the 1929 stock market crash, 1930 saw the introduction of the protectionist Corn Law-esque “Smoot-Hawley” tariffs (some say the market predicted the tariffs, which were debated in 1929.) Trade dried up as most other countries put up protective trade tariffs and increased taxes to make up for lost duties.

Global Governance and Financial Crises by Meghnad Desai, Yahia Said

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Asian financial crisis, bank run, banking crisis, Bretton Woods, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

The fierce competition between banks, in search of high volumes of international credit to make up for lost domestic credit with the growth slowdown in OECD countries, had made the supply of funds highly elastic to demand changes. Subsequently the recurrent problem of the scarcity of reserves, which had motivated the creation of the SDR, was no longer relevant. Moreover, as far as adjustment was concerned, floating exchange rates had resolved in principle the conflict between internal and external balance and jettisoned the need of policy cooperation. The monetarist counterrevolution was at high tide at the time. It offered an ideological background to the rebound of monetary nationalism according to which “each country should put its own house in order.” This view expected capital markets to take care of themselves and to drive exchange rates to their equilibrium values reflecting the conditions prevailing in domestic economies.

International capital markets fed the world with a fast-increasing amount of reserves, but they proved unable to regulate the distribution of borrowed reserves among countries. Sovereign indebtedness was not properly assessed, entailing abrupt disruptions between excessive tolerance to borrowing and acute credit crunches. Besides, equilibrium exchange rates were elusive. Huge gyrations of floating exchange rates and foreign exchange crises, which devastated pegged regimes, convinced most governments that exchange rates were too important to be left to the markets. But individual governments were powerless against speculative attacks while reduced to their own means. The malfunctioning of the market-led system in both exchange rate adjustment and solvency control gave content to the Fund’s missions restated in Jamaica.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

After a weekend of deliberation at Camp David, Nixon unilaterally “closed the gold window.” Foreign governments could redeem gold for dollars on Friday—but not on Monday. Since then, the United States (and all other industrialized nations) have operated with “fiat money,” which is a fancy way of saying that those dollars are just paper. Floating exchange rates. The gold standard fixes currencies against one another; floating rates allow them to fluctuate as economic conditions dictate, even minute by minute. Most developed economies have floating exchange rates; currencies are traded on foreign exchange markets, just like a stock exchange or eBay. At any given time, the exchange rate between the dollar and yen reflects the price at which parties are willing to voluntarily trade one for the other—just like the market price of anything else. When Toyota makes loads of dollars selling cars in the United States, they trade them for yen with some party that is looking to do the opposite.

When Toyota makes loads of dollars selling cars in the United States, they trade them for yen with some party that is looking to do the opposite. (Or Toyota can use the dollars to pay American workers, make investments inside the United States, or buy American inputs.) With floating exchange rates, governments have no obligation to maintain a certain value of their currency, as they do under the gold standard. The primary drawback of this system is that currency fluctuations create an added layer of uncertainty for firms doing international business. Ford may make huge profits in Europe only to lose money in the foreign exchange markets when it tries to bring the euros back home. So far, exchange rate volatility has proven to be a drawback of floating rates, though not a fatal flaw. International companies can use the financial markets to hedge their currency risk.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

In fact, the outcome has probably been shaped by all these things. It is no doubt also because of the ageing of societies. But that is not a sufficient explanation. Note that many ageing societies do not run large current-account surpluses (consider Italy, for example) and that Germany ran sizeable current-account surpluses before ageing had really set in (prior to German unification). In the case of Japan, a floating exchange rate makes this policy more difficult to sustain than for Germany (as we will see later in this chapter), at least since the latter became part of the Eurozone. That is why Japan has periodically felt obliged to keep the yen down by accumulating foreign-currency reserves.27 The aggressive monetary policies of Abenomics, introduced under Prime Minister Shinzo Abe, may also be an attempt to restore lost growth by improving external competitiveness: between November 2012 (that is, just before he became prime minister for the second time) and July 2013, the JP Morgan broad trade-weighted real exchange rate of the yen fell by 17 per cent.

Other economists have argued for such a policy in the event of crises, among them Keynes with his celebrated suggestion that people be paid to dig up bottles full of pound notes, and Ben Bernanke, when considering policy options confronting Japan in the early 2000s.52 This seems a solution to any long-term problem of structural-demand deficiency. Instead of relying on private-sector credit booms to generate a temporary return to full employment or accept a semi-permanent depression, let the government use its capacity to create money, already accepted when countries moved to floating exchange rates. This is not only what many in the Chicago School would have accepted. It is also the recommendation of those who believe in Modern Monetary Theory (see Chapter Six above). Meanwhile, control over the quantity of money to be printed would be left with the central bank, which would create the amount of money it deemed non-inflationary. The government would be forced to borrow to cover deficits beyond those funded by the central bank.

The international gold standard is just a particularly rigid form of fixed exchange-rate arrangement. If one wants to understand the problems of such arrangements, in modern circumstances, one need merely look at what happened in the 1920s and 1930s and more recently in the Eurozone. Fixed exchange rates are a recipe for instability. For small open economies with flexible labour markets, such as Hong Kong or the Baltic states, this may be better than the instability generated by floating exchange rates. For larger economies the idea that the exchange rate should dictate monetary policy is less sensible. It is also inconceivable that the US would follow such a rule: it did not do so after creation of the Federal Reserve in 1913, even though the dollar was notionally tied to gold until 1971. In brief, the idea that the world will go back to gold-backed money or the international gold-exchange standard is a fantasy.


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War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liberal capitalism, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, Plutocrats, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

The problem was the gold link, of which he observed that ‘the mere suggestion that our proposals can be regarded in the light of a return to gold, is enough to make 99 per cent of the people of this country see red’. By contrast, he had noticed that the ‘atmosphere in the House of Lords yesterday [when he made his speech in support of the Bretton Woods proposals] was quite free’ from the rather antagonistic mood of the House of Commons.19 To modern analysts, however, Bretton Woods was a lot more similar to the pre-1914 gold standard than it would be to the world of freely floating exchange rates of the late twentieth century. Like the gold standard, the Bretton Woods system proposed a regime of fixed exchange rates, though it did allow for some devaluation, if ‘fundamental disequilibrium’ occurred. In many ways, Bretton Woods was even more rigid than the old gold standard, as it required capital controls, whereas the old system had not. Even more restrictive was the prohibition on exchanging currencies directly for gold.

As Paul Volcker remembered, Jimmy Carter’s appointments to the ‘main economic posts in the Treasury, the Council of Economic Advisers, and the State Department were of a quite different breed from the monetarists predominant during the later Nixon–Ford years’. Carter’s people all had ‘professional training in economics and had seen substantial governmental service in the 1960s’. These advisers and officials supported ‘floating exchange rates’ and shared, by ‘instinct and experience’, the ‘Keynesian faith in the ability of governments to maximize the performance of the economy and indeed of the market itself’.41 The persistence of inflation in the second half of the 1970s well into the Carter presidency created yet more uncertainty and despondency. The years 1976–8 saw the return of higher inflation.42 Paul Volcker, who would be appointed Chairman of the Federal Reserve by Jimmy Carter in 1979, spoke in 1978 about the recession of 1974 and 1975 which had ‘sprung on an unsuspecting world with an intensity unmatched in the post-World War II period’.

The result of this pressure was that ‘the dollar today [2010] has fallen 75 percent against the yen, and we still have a trading deficit’. China’s successful export policy, its continuing trade surpluses with the United States, had more to do with the ‘trade policies and structure’ of the United States than with the exchange rate. Once again, Chinese officials emphasized the benefits of stability as opposed to the free-floating exchange rates which had been a feature of global currency markets since the collapse of Bretton Woods: ‘A stable yuan is of vital significance to the global economic development and the stability of the international monetary system.’43 The consequence of China’s exporting success was the accumulation of trillions of dollars of reserves. At the beginning of 2012, it was reported that Chinese reserves had slipped 0.6 per cent in the last quarter of 2011.


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The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

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Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, labour mobility, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, uranium enrichment, Washington Consensus, working-age population, yield curve

This combination of openness and opaqueness is disarming; the IMF is transparently nontransparent. The IMF’s mission has repeatedly morphed over the decades since Bretton Woods. In the 1950s and 1960s, it was the caretaker of the fixed-exchange-rate gold standard and a swing lender to countries experiencing balance-of-payments difficulties. In the 1970s, it was a forum for the transition from the gold standard to floating exchange rates, engaging in massive sales of gold at U.S. insistence to help suppress the price. In the 1980s and 1990s, the IMF was like a doctor who made house calls, dispensing bad medicine in the form of incompetent advice to emerging economies. This role ended abruptly with blood in the streets of Jakarta and Seoul and scores killed as a result of the IMF’s mishandling of the 1997–98 global financial crisis.

The dollar was devalued again on February 12, 1973, by an additional 10 percent so that gold’s new official price was $42.22 per ounce; this is still gold’s official price today for certain central banks, for the U.S. Treasury, and for IMF accounting purposes, although it bears no relationship to the much higher market price. During this period, 1971–73, the international monetary system moved haltingly toward a floating-exchange-rate regime, which still prevails today. In 1972 the IMF convened the Committee of Twenty, C-20, consisting of the twenty member countries represented on its executive board, to consider the reform of the international monetary system. The C-20 issued a report in June 1974, the “Outline of Reform, that provided guidelines for the new floating-rate system and recommended that the SDR be converted from a gold-backed reserve asset to one referencing a basket of paper currencies.

See also European Union (EU) Charlemagne’s Frankenreich, 112, 113–14 post–World War II steps to unification, 116–18 warfare and conquest in, history of, 115–16 European Atomic Energy Community (Euratom), 116–17 European Central Bank (ECB), 117, 172 European Coal and Steel Community (ECSC), 116, 117 European Communities (EC), 117 European Economic Community (EEC), 116–17 European Rate Mechanism (ERM), 153 European Union (EU), 113, 121–37 Berlin Consensus and, 121–27 Chinese investment in, 126–27 demographics of, 134–35 expanding membership of, 136 fiscal and banking reforms, since 2011, 135–36 future of, 132–37 IMF commitment of, 202 precursor organizations and founding of, 116–18 sovereign debt crisis of 2010 and, 128–30 U.S. investment in, 127 Eurozone, 117, 121–27, 129, 130, 135, 136 gold-to-GDP ratio of, 157, 280 exchange rates, 130 external adjustment of unit labor costs, 131 Fail-Safe (film), 63 Fannie Mae, 248 Federal Open Market Committee (FOMC), 249–52 Federal Reserve asset bubble creation by, 75–78 bank risk taking in low-interest-rate environment created by, 80–81 central bank, status as, 198–99 central planning by, 69, 71, 87 debt and deficits, monetary policy’s relation to, 176–77, 180–89 deflation and, 9–11, 76–83 easy-money policy of (See easy-money policy of Federal Reserve) financial repression engineered by, 183–84 financial war, views on, 60–62 FOMC member views on tapering versus money-printing, 249–52 forward guidance of, 83, 86, 185–88 gold held in vaults of, 230 Great Depression monetary policy of, 223 Greenspan’s battling of deflation and creation of housing bubble, 76 insolvency of, 286–88 irreversibility of money creation and, 290 money contract and, 167, 180–89 PDS inputs, and monetary policy, 180–83 quantitative easing (QE) programs, 184–85 real income declines resulting from policies of, 78–79 savers penalized by policies of, 79 SME lending damaged by policies of, 79–80 U.S Treasury debt purchases by, 172 wealth effect and, 72–75 zero-interest-rate policy of, 72, 73, 79–81, 185, 186, 260 Federal Reserve Bank of New York, 73–74, 230 Federal Reserve Notes, 167 Federation of American Scientists, 58 fiat money, 168–69 financial repression, 183–84 financial risk, 85, 268–70 financial transmission, 193–94 financial war, 6–7, 42–64 accidental, 63 Chinese cybercapabilities, 45–46, 51–53 CIC-Blackstone deal, 51–52 cyberattacks combined with, 59–60 defensive aspects of, 46 enemy hedge fund scenario, 47–51 equilibrium models and, 62 Federal Reserve’s view of, 60–62 MARKINT as means of detecting, 40–41 offensive aspects of, 46 panic dynamic and, 62 physical targets, 46 purpose of, 61 solutions to, 64 U.S. cybercapabilities, 53–54 U.S.-Iran, 54–58 U.S.-Syria, 57 U.S. Treasury’s view of, 60–62 virtual targets, 46 Wall Street’s cybercapabilities, 54 war games, 58–59 fine art, as investment, 299 fiscal dominance, 287–88 Fiscal Stability Treaty (EU), 135–36 Fisher, Irving, 168, 246–47 Fisker, 123 Fitzgerald, F. Scott, 252 flash crash, 63, 270, 296–97 floating-exchange-rate regime, 235 Fonda, Jane, 1 food price inflation, 3 food stamps, 246 Ford, Gerald, 271–72 forward guidance, 83, 86, 185–88 forwards, gold, 275, 285–86 France, 235, 236 Franco-Prussian War, 115 Frank, Barney, 204, 205 Frankenreich, 112, 113–14 Freakonomics (Levitt and Dubner), 32–33 Freddie Mac, 248 Friedman, Milton, 84, 168, 263 Friedman, Tom, 256 Froman, Michael, 195, 196, 202–3 futures, gold, 275, 284–86 G7, 139, 140, 147 G9, 139–40 G20, 140, 147, 202, 203 Galloni, Alessandra, 131–32 Gang of Ten, 138, 139 Geithner, Timothy, 195, 196, 203, 244 General Electric, 255 General Theory of Employment, Interest and Money, The (Keynes), 246–47 Genoa Conference, 1922, 221–22 Gensler, Gary, 195, 196 geopolitics, 12–13 Germany, 125, 127, 136–37, 281 gold repatriation by, 231–32 GIIPS (Greece, Ireland, Italy, Portugal, Spain), 140, 142–46 Glass-Steagall, repeal of, 196, 253, 296 gold, 215–42 BIS transactions, 276–78 central bank acquisition of, since 2010, 225–30 central bank manipulation of, 271–81 Charlemagne’s switch from gold to silver standard, 114 Chávez’s repatriation of, 40, 231 China’s accumulation of, 12, 61, 226–30, 282–84, 296 classical gold standard, 1870–1914, 176, 234–35 constructing new gold standard, 237–42 contract money system, role in, 169–71 contracts based on, risks associated with, 217–18 disorderly price movements, implications of, 295–96 dollar convertibility abandoned, in 1971, 1, 2, 5, 209, 220, 235, 285 dollar standard, 234–35 drop from 1980 highs, 2 forwards, 275, 285–86 futures, 275, 284–86 Germany’s repatriation of, 231–32 gold exchange standard, 221–22, 224, 234–35 gold-to-GDP ratios, 157, 279–82 Great Depression caused by gold myth, 221–24 IMF sales of, 235–36, 277 as investment portfolio recommendation, 298–99 Iranian trading of, in financial war with U.S., 55–56 lease arrangements, 275, 284 market panics caused by gold myth, 224 monetary policy, and classical gold standard, 176 monetary system, role in, 217, 220–25 as M-Subzero, 280, 283–84 nature of, 218–20 as numeraire, 219–20 price rise of, 1977 to 1980, 1 price rise of, 2006 to 2011, 3 private market demand for, 230 quantity insufficient to support world trade and finance myth, 220 repatriation of, 40, 231–34 reserves, rebalancing of, 279–84 return-to-gold-standard scenario, 293–94 as risk-free asset, 219 Russia’s accumulation of, 12, 229–30 shadow gold standard, 236 storage of, at Federal Reserve and Bank of England vaults, 230–31 swaps, 275 Switzerland’s repatriation of, 232–33 U.S. attitude to, shift in, 235, 236 Gold and Foreign Exchange Committee, 272–73 Goldberg, Jonah, 294 Gold Bloc devaluations, 222 Goldman Sachs, 32–33, 128, 139, 140, 205, 206, 262 gold-to-GDP ratios, 157, 279–82 Goodhardt, Charles, 71, 72, 87, 188 Goodhardt’s Law, 71, 87 Gotthard Base Tunnel, 123 government debt repayment, impact of deflation on, 9, 258 government program dependency, in U.S., 246 Graeber, David, 255 Grant, James, 177 Great Depression, 84, 85, 125–26, 155, 221–22, 223–24, 234, 244, 245 Greece, 128, 133–34, 142, 153, 200, 290 greed, 25 Greenspan, Alan, 76, 77, 122 gross domestic product (GDP) of China, 93, 96 components of, 84, 96 debt-to-GDP ratio, 9, 159–60, 173, 258–59, 261 of U.S., 96, 244 Gulf Cooperation Council (GCC), 12, 150, 152–57 monetary integration process and, 153–57 as quasi-currency union, 153 Hague Congress, 116 Hall, Robert, 86–87 Hamilton, Alexander, 120–21 Han Dynasty, 90 Hanke, Steve, 80 Haydn, Michael, 37 Hayek, Friedrich, 70–71, 72, 87 hedge fund covert operations, 47–51 Hemingway, Ernest, 256 Herzegovina, 136 Himes, James, 284 Holocaust, 115 Holy Roman Empire, 114, 115 Hong Ziuquan, 91 Hoover, Herbert, 85 housing market bubbles in, 75, 76–77, 248 collapse of, 2007, 248, 296 rise in, since 2009, 291 wealth effect and, 72, 73 HSBC, 227 Hu Jintao, 151–52, 202 Hunt, Lacy H., 74, 79 Hunt brothers, 217 Hyundai, 82 ImClone Systems, 25 income inequality, in China, 106 India, 12, 139, 151.


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An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy by Marc Levinson

affirmative action, airline deregulation, banking crisis, Big bang: deregulation of the City of London, Boycotts of Israel, Bretton Woods, Capital in the Twenty-First Century by Thomas Piketty, car-free, Carmen Reinhart, central bank independence, centre right, clean water, deindustrialization, endogenous growth, falling living standards, financial deregulation, floating exchange rates, full employment, George Gilder, Gini coefficient, global supply chain, income inequality, income per capita, indoor plumbing, informal economy, intermodal, invisible hand, Kenneth Rogoff, knowledge economy, late capitalism, linear programming, lump of labour, manufacturing employment, new economy, Nixon shock, North Sea oil, oil shock, Paul Samuelson, pension reform, price stability, purchasing power parity, refrigerator car, Right to Buy, rising living standards, Robert Gordon, rolodex, Ronald Coase, Ronald Reagan, Simon Kuznets, statistical model, strikebreaker, structural adjustment programs, Thomas Malthus, total factor productivity, unorthodox policies, upwardly mobile, War on Poverty, Washington Consensus, Winter of Discontent, Wolfgang Streeck, women in the workforce, working-age population, yield curve, Yom Kippur War, zero-sum game

See OECD Council Working Party on Shipbuilding, “Peer Review of Japanese Government Support Measures to the Shipbuilding Sector,” C/WP6 (2012) 26, 7. 14. Yoshimitsu Imuta, “Transition to a Floating Exchange Rate,” in Mikiyo Sumiya, ed., A History of Japanese Trade and Industry Policy (Oxford: Oxford University Press, 2000), 528; Sueo Sekiguchi, “Japan: A Plethora of Programs,” in Hugh Patrick, ed., Pacific Basin Industries in Distress (New York: Columbia University Press, 1990), 437. 15. William Diebold Jr., Industrial Policy as an International Issue (New York: McGraw-Hill, 1980), 162; Japan Automobile Manufacturers Association, Motor Vehicle Statistics of Japan 2014, 16, 32. 16. Imuta, “Transition to a Floating Exchange Rate,” 527. Data on Japanese R&D spending are from Steven Englander and Axel Mittelstädt, “Total Factor Productivity: Macroeconomic and Structural Aspects of the Slowdown,” OECD Economic Survey 10 (1988): 36. 17.

If exchange rates moved the wrong way, the loan repayments could be worth less than the banks’ dollar obligations to their depositors. And should an oil sheikhdom suddenly demand its dollars back, a bank that had used them to make five-year loans in British pounds or Dutch guilders could find itself desperate for cash. This was a frightening prospect, for in the new world of global finance and floating exchange rates, banks were more intimately connected than ever before. They not only lent one another money and joined forces to make loans, but also traded currencies to meet their customers’ needs. In many cases, those trades involved betting on an exchange rate at some future date. For example, a Spanish textile company expecting to receive one million West German deutsche marks in six months could lock in the value of that sum in Spanish pesetas, with its bank assuming the risk if the exchange rate on that date turned out to be different from what it anticipated.


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

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accounting loophole / creative accounting, Bretton Woods, business climate, capital controls, central bank independence, currency peg, financial innovation, floating exchange rates, full employment, inflation targeting, information asymmetry, labour market flexibility, labour mobility, market fundamentalism, money market fund, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Y2K, yield curve

Initial empirical studies do indeed confirm that the ECB need not fear comparison with other, established central banks.30 Not a bad outcome for such a young institution, one which moreover has to formulate monetary policy under inordinately more difficult conditions. Monetary policy and the exchange rate Fundamental significance of the exchange rate regime One of the most important economic policy decisions at the macro level concerns the choice of exchange rate regime. This can best be illustrated by looking at the two extremes of a fixed and a floating exchange rate respectively. If a country fixes, or pegs, the exchange rate of its currency to that of another country, this has serious consequences for monetary policy in particular. Given full convertibility, such a fixed exchange rate system can only mean that the institution responsible, generally the central bank, must intervene in the foreign exchange market whenever the market rate threatens to diverge from the fixed rate, or parity.31 Essentially, this obligation to intervene implies that monetary policy must be geared to stabilising the exchange rate.

The same considerations apply if the currency is linked to a metal (such as under the gold standard) or the price of a basket of commodities (commodity-reserve currency). 170 • The ECB – monetary policy for a stable euro If, in contrast, the market is left to determine the exchange rate, and the central bank therefore has no obligation to intervene, it can in principle direct its policy measures towards fulfilling a domestic mandate. Only with a flexible (floating) exchange rate is the central bank able to achieve a domestic objective (generally speaking, the objective of price stability).32 The choice of exchange rate regime is of central importance for monetary policy and also for the place of the central bank in the macroeconomic policy framework. If a fixed exchange rate system is chosen, this ultimately means no less than that, even if it may continue to exist de jure, the independence of the central bank exists de facto only on paper, in that its obligation to intervene in the foreign exchange market fundamentally robs the central bank of its sovereignty over monetary policy-making.33 The same considerations as for an individual country also apply to the currency and the central bank of a monetary union.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

Austerity as Policy in the USA: 1921–1937 Rather than a slump after World War I, the United States experienced a boom as pent-up demand and massively expanded money supplies erupted from within war-shocked economies around the world. The boom was, however, short-lived, and in the continental European economies it was accompanied by significant inflation and, in some cases, a hard landing. No slump followed in the United States, however, for an unexpected reason—floating exchange rates in Europe (most countries were off gold) allowed countries to deflate externally instead of through domestic prices—and so recovery followed rapid disinflation.17 The Roaring Twenties began with a bump in Europe but not the United States, precisely because the Americans were not on gold. The early warning lights for the United States were blinking, however, in the form of falling agricultural prices and an increasingly volatile banking sector.

These efforts to get us out of this mess may not be popular, but one, or both, is coming. The End of Banking The story of the crisis reconstructed in chapters 2 and 3 can, and perhaps should, be seen in a bigger context. At the end of the Bretton Woods era, when the United States finally went off gold in 1971, states around the world had to adjust to what Eric Helleiner has called “the reemergence of global finance.”3 Floating exchange rates, deregulation, disintermediation, and the rest, which made finance the most profitable sector of the American and British economies by the 2000s, was the new order of things. But what was it all really based upon? After all, finance is most properly thought of as a part of the information system of the economy: linking borrowers and lenders while sitting in the middle collecting a fee. It’s not an industry in the traditional sense, and it certainly should not have been producing 40 percent of corporate profits in the United States on the eve of the crisis—so why was it able to do just that?


pages: 273 words: 87,159

The Vanishing Middle Class: Prejudice and Power in a Dual Economy by Peter Temin

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, Affordable Care Act / Obamacare, American Legislative Exchange Council, American Society of Civil Engineers: Report Card, anti-communist, Bernie Sanders, Branko Milanovic, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carried interest, clean water, corporate raider, Corrections Corporation of America, crack epidemic, deindustrialization, desegregation, Donald Trump, Edward Glaeser, Ferguson, Missouri, financial innovation, financial intermediation, floating exchange rates, full employment, income inequality, intangible asset, invisible hand, low skilled workers, low-wage service sector, mandatory minimum, manufacturing employment, Mark Zuckerberg, mass immigration, mass incarceration, means of production, mortgage debt, Network effects, New Urbanism, Nixon shock, obamacare, offshore financial centre, oil shock, Plutocrats, plutocrats, Powell Memorandum, price stability, race to the bottom, road to serfdom, Ronald Reagan, secular stagnation, Silicon Valley, Simon Kuznets, the scientific method, War on Poverty, Washington Consensus, white flight, working poor

He won election to the presidency through a Southern Strategy that appealed to Southern racism and opposition to the Civil Rights Movement. He abandoned Johnson’s War on Poverty and declared a War on Drugs in 1971. He also abandoned the fixed exchange rate of the Bretton Woods system to deal with the strain on the dollar exerted by the expanding war in Vietnam.2 Nixon switched the United States to a floating exchange rate, transferring responsibility for the domestic economy from the federal government, which controls fiscal policy, to the Federal Reserve System, which controls monetary policy. The Fed had been securing the exchange rate for the previous quarter century, and it had to learn how to fulfill its new role. This process was complicated greatly when the Organization of Petroleum Exporting Countries (OPEC) quadrupled the price of oil in 1973.

Bradley, 116–117, 129, 142 Mincer, Jacob, 165 Minimum wage, 62, 72, 79 Minow, Martha, 111, 134 Mobility, 7, 32, 46, 133, 154, 159 Mortality, 33, 39–40, 58, 126, 154 Mortgages bubbles and, 154–155 discrimination and, 117 Fannie Mae and, 138 FIRE sector and, 80 forgiving, 156 Freddy Mac and, 138 Great Migration and, 34 HAMP and, 139–140 hedge funds and, 179n5 housing and, 34, 44–45, 69, 80, 117, 137–140, 154, 156, 179n5 Investment Theory of Politics and, 69 low-wage sector and, 34 race and, 117 reform for, 156 restricted access to, 117 security and, 138 transition and, 44–45 Mundell-Fleming model, 169n3 Murray, Charles, 132 Mutual funds, 31 NAACP, 116–117 National defense, 17–18, 93 National Federation of Independent Business, 97 National Review magazine, 51 National Rifle Association, 97 Native Americans, xi, 84 Neoliberalism, 17, 21–22 New Deal, 21, 52, 65, 80–81, 101, 141 New Federalism, 21–22, 35, 44, 83, 103, 110 New Jim Crow, 27, 49, 104, 154 New Jim Crow, The (Alexander), xvi Newman, Oscar, 131–132 New Yorker magazine, 83, 135 New York Times newspaper, 125 Nineteenth Amendment, 56, 58, 67 Nixon, Richard M. depletion allowance and, 81 floating exchange rate and, 15 Ford and, 168n2 Johnson and, 15, 27, 168n2 Kennedy and, 81 mass incarceration and, 104, 109 military draft and, 16 New Federalism and, 21–22, 35, 44, 83, 103, 110 Powell and, 17, 27, 117 Project Independence and, 16, 71, 143 public education and, 117 Rehnquist and, 95, 142 Roberts and, 142 segregation and, 27 Southern Strategy and, 15, 27, 35, 81, 117, 142 War on Drugs and, xv–xvi, 15, 37–38, 53, 55, 104, 106, 110, 132 Nixon Shock, 169n3 Nobel Prize, 7, 49, 124, 162, 164 North cities and, 132–134 concepts of government and, 88, 94 FTE (finance, technology, and electronics) sector and, 20 Great Migration and, 20, 27–28 (see also Great Migration) Investment Theory of Politics and, 62–66 low-wage sector and, 27–29, 32, 34 manufacturing jobs in, 20 mass incarceration and, 104 public education and, 119, 125 race and, 51–53, 55, 59 unions and, 20 North American Free Trade Agreement (NAFTA), 55 Northeast Corridor, 134 Norway, 149 Obama, Barack, 25, 38, 81–84, 91, 96, 127, 175n12 Occupational Safety and Health Administration (OSHA), 90 Offshoring, 28, 32 Oil, 80–81, 180n13 depletion allowance of, 81 Koch brothers and, 17–19, 83–85, 92, 97, 110–111, 158–159, 169n12, 175n17 OPEC and, 16, 143 Project Independence and, 16, 71, 143 shock of, 16 Oligarchy, 65, 72, 87–89, 93–97, 115, 159 One-percenters CEO salaries and, 24 Reagan and, 22–23 tax cuts for, 22–23 very rich and, 3, 9–12, 22–24, 77–85, 92, 96, 155, 170n28 Organization of Petroleum Exporting Countries (OPEC), 16, 143 Oxymorons, 15, 101, 110-111, 156.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, Plutocrats, plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

The Italian lira, meanwhile, fell almost 27 per cent against the US dollar and also ended up with an inflation rate close to 14 per cent. THE IMF RIDES TO THE RESCUE With all this monetary chaos, it would be reasonable to think that the IMF would be in trouble, perhaps heading in monetary terms towards oblivion, in much the same way as the League of Nations had done in diplomatic terms four decades earlier. Yet, as the 1970s progressed, it became increasingly apparent that, with a move to floating exchange rates, the IMF’s role was, if anything, strengthening. First, the dollar’s heightened volatility meant that reserve managers elsewhere in the world craved an alternative monetary store of value that would be neither dollars nor gold. The IMF’s Special Drawing Rights (SDRs) – known colloquially as ‘paper gold’ – proved to be just the ticket. Representing a basket of major currencies, they allowed reserve managers to escape the heightened dollar volatility associated with the vagaries of US monetary policy.

A country can commit to unrestrained cross-border capital flows and a stable exchange rate, but only if it relinquishes control of its inflation rate: if the currency is under upward pressure thanks to strong capital inflows, interest rates will have to come down to prevent the currency from rising. By cutting interest rates, however, inflation will in all likelihood end up higher. Finally, and for the sake of completeness, a country can choose its own inflation rate and welcome cross-border capital flows, but only if it is prepared to accept a floating exchange rate. In other words, a policymaker can commit to only two out of three key policy objectives, even if it might seem desirable to embrace them all. It is impossible to commit to free-flowing capital across borders and, at the same time, deliver both a stable exchange rate and a stable inflation rate. The three simply cannot be achieved simultaneously. THE 1980S POLICY COORDINATION EXPERIMENT In the 1980s, attempts were made to deal with this dilemma – or, more accurately, trilemma – through so-called international policy coordination.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

As long as the laissez-faire economics of Capitalism 3.3 was dominant, it was impossible for the G7, the IMF, the World Trade Organization, or any other international forum to engage in serious discussions about currencies and other issues of global management. Until the emergency meetings that followed the Lehman crisis, all that happened in such international gatherings was that the U.S., British, and German delegates felt obliged by their ideologies to preach the gospel of free-floating exchange rates and to repudiate all government intervention in currency markets at all times. By contrast, China and other emerging economies, quietly backed by Japan, France, and Italy, by contrast insisted that currencies and capital flows were government prerogatives too important to be left to turbulent and unpredictable markets. All discussions of international monetary issues were thus a dialogue of the deaf.

The theoretical benefits of free trade and comparative advantage will be counterbalanced explicitly by other economic objectives—initially the imperative of job creation after the recession and later the desirability of preserving a diversified industrial structure. Third, the pressure to coordinate macroeconomic and currency policies among the major trading economies—America, Europe, China, and Japan—will become irresistible. Such coordination will have major implications for the post-Bretton Woods system of floating exchange rates and for the governance of global political and economic institutions—two issues discussed at the end of this chapter. Limits to Growth and Physical Resources The market-knows-best philosophy of Capitalism 3.3 assumed that there could be no constraints on the growth of the world economy. If any physical or environmental limits to growth did appear, the market would soon send the right price signals to ensure that these obstacles were automatically avoided.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liberal capitalism, light touch regulation, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, Mikhail Gorbachev, millennium bug, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, working poor, zero-sum game, éminence grise

Policy-makers and bankers themselves had always been more attached to competition than regulation – it was intellectually and philosophically more acceptable, and it afforded huge opportunities to make serious money. But now there was a paradigm shift in the argument. Markets, bankers argued, would do better than the state. Banks, they claimed, needed more freedom to manage their balance sheets and risk in an environment of floating exchange rates and free capital movements. Leading the charge were the banking communities in New York and London, using all their influence, especially with free-market-inclined Conservative and Republican politicians, to break down rules and promote competition. Who, after all, could be against more competition? Like motherhood and apple pie, it seemed a self-evident public good, especially now that the market panics, bank runs and credit crunches coincident with deregulated finance which had inspired the irksome rules in the first place were slipping from living memory.

Indeed, as herd, bubble effects grew and more aggressive risk-taking became the norm, it became increasingly obvious that more competitive banking structures would eventually be bad for everyone. But for big finance there remained no doubt that it was on the right track. There was already a vast pool of money available to the banks and other companies, managed by professional treasury managers – the so-called interbank money market. This had been developing since the 1960s and was given a huge boost when the era of floating exchange rates began. Companies, banks and even countries dealing in cash denominated in one of the world’s reserve currencies could lend to each other in that currency or access the interbank market in another reserve currency – principally the dollar and the yen, but also the pound, the Swiss franc and German mark – and hedge against the risk of potentially adverse, loss-making movements. They could buy derivatives – essentially promises to settle a deal in the future at a rate linked to today’s rate (arithmetically connected to relative future interest rates) – or they could swap each other’s liabilities and assets.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

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affirmative action, Albert Einstein, Bernie Madoff, British Empire, capital controls, cleantech, cloud computing, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, George Gilder, Gunnar Myrdal, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, knowledge economy, labor-force participation, margin call, Mark Zuckerberg, means of production, medical malpractice, minimum wage unemployment, money market fund, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, price stability, Ralph Nader, rent control, Robert Gordon, Ronald Reagan, Silicon Valley, Simon Kuznets, skunkworks, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve, zero-sum game

Investment credits and rapid depreciation allowances—although better than no tax cuts at all—tend to favor the re-creation of current capital stock rather than the creation of new forms of capital and modes of production. Antitrust suits are directed chiefly against successful competitors (such as IBM) and ignore the government policies as the root of most American monopoly. The system of floating exchange rates deals with lapses in international trade by depreciating the dollar rather than by forcing a competitive response of greater productivity and new products. Our taxation and subsidy systems excessively cushion failure (of businesses, individuals, and local governments), reward the creativity and resourcefulness chiefly of corporate lawyers and accountants, and wait hungrily in ambush for all unexpected, and thus unsheltered, business success.

See Food and Drug Administration federal aid, economic growth and federal borrowing federal budget Federal Deposit Insurance Corporation (FDIC) federal disability benefits Federal Home Loan Bank federal programs, growth of Federal regulation. See Regulation Federal Reserve Feige, Edgar Feldstein, Martin Ferguson, Charles feudalism Filipinos Financial markets. See also Stock market Financing Failure: A Century of Bailouts first-job barrier First National Bank of Boston fiscal integrity floating exchange rates Food and Drug Administration (FDA) food stamps Forbes Ford, Gerald Ford, Henry Ford Foundation Ford Motor Company foreign money Forrester, Jay Fortune foundations France Frank, Barney Fraser, Malcolm Freddie Mac Friedman, Milton Friedman, Thomas fringe benefits G Galbraith, John Kenneth Galileo gambler’s ruin gambling impulse gambling stocks Gans, Herbert GAO.


pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

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Asian financial crisis, asset allocation, Berlin Wall, Bretton Woods, Brownian motion, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

But hints that a devaluation might be looming can cause massive speculation against the vulnerable currency, as we shall discuss in chapter 8. See also [248] for an eye-opening description of the conundrums of monetary policies. With the end of Bretton Woods in the early 1970s, the market for foreign currency grew rapidly in both size and instability. The liberalization of capital flows that followed the adoption of floating-exchange rates brought vastly larger flows of capital between nations. The first naive presumption is that the exchange rate between two currencies, say the U.S. dollar and the European euro (since January 1999), would be determined by the needs of trade: by North Americans trading with Europeans for euros in order to buy European goods, and conversely. However, there is another important population, the investors: people who are buying and selling currencies in order to purchase stocks and bonds in the U.S. and/or the European markets.

Since these investment demands are highly variable, including a fluctuating component of speculation, currency values prove volatile and prone to the same forces as described in chapters 4 and 5 for stocks and general financial markets. Such forces proved to be at the origin of the speculative bubble on the dollar in the first half of the 1980s [340]. The role of monetary policy allowed by the floating-exchange rate was particularly clear in the context of the large deficit of the U.S. federal budget in the early 1980s, which led to fears that inflation would go sky-high. According to supporters of monetary policy, the key to controlling inflation was that the Federal Reserve did not pump up the money supply too much. Indeed, by allowing a strong dollar (which slows the U.S. economy) and restricting the money supply, the Federal Reserve chopped inflation from 13.3% in 1979 to 4.4% in 1987 to about 2% at the end of the twentieth century.


pages: 572 words: 134,335

The Making of an Atlantic Ruling Class by Kees Van der Pijl

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anti-communist, banking crisis, Berlin Wall, Boycotts of Israel, Bretton Woods, British Empire, capital controls, collective bargaining, colonial rule, cuban missile crisis, deindustrialization, deskilling, diversified portfolio, European colonialism, floating exchange rates, full employment, imperial preference, Joseph Schumpeter, liberal capitalism, mass immigration, means of production, North Sea oil, Plutocrats, plutocrats, profit maximization, RAND corporation, strikebreaker, trade liberalization, trade route, union organizing, uranium enrichment, urban renewal, War on Poverty

In May, Pompidou and Heath rejected the offer to meet with Nixon in the framework of a conference of Atlantic leaders as ‘premature’.43 The Nixon/Kissinger/Connally policy destroyed the Atlantic constraint and precipitated the crisis of the mode of accumulation which had developed under it. In the monetary field, the unilateral dollar policy provided the liquidity for a global restructuration of capital and at the same time put the United States at an advantage. As Parboni writes, ‘The system of floating exchange rates also eliminated any need for the United States to control its own balance of payments deficit, no matter what its source, because it was now possible to release unlimited quantities of non-convertible dollars into international circulation’.44 The October War in the Middle East provided the Americans with an opportunity to force compliance with the new American international concept on the part of all Western European countries except France.

As Parboni has argued, American supremacy henceforward rested on the fact that it could resort to such devaluations without seeing them eroded again by inflation due to more expensive imports. On the other hand, as private international dollar liquidity grew explosively after 1971, involuntary credit from the rest of the world not only financed the American deficit, but all countries turned to the booming capital markets to finance their deficits now that the regime of floating exchange rates suspended the central banks’ function of intervening in foreign money markets.52 The financing rather than balancing of deficits opened enormous markets for bank capital, and eventually, for all other forms of money-capital as well. The liberation of banks from the Keynesian controls imposed on them in the 1930s on both sides of the Atlantic still was part of the unifying trend of the mid 1960s, spurred on by the Kennedy offensive.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

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activist fund / activist shareholder / activist investor, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

Bubbles are not the only form in which reflexivity manifests itself. They are just the most dramatic and the most directly opposed to the efficient market hypothesis; so they do deserve special attention. But reflexivity can take many other forms. In currency markets, for instance, the upside and downside are symmetrical so that there is no sign of an asymmetry between boom and bust. But there is no sign of equilibrium either. Freely floating exchange rates tend to move in large, multi-year waves. The most important and most interesting reflexive interaction takes place between the financial authorities and financial markets. While bubbles only occur intermittently, the interplay between authorities and markets is an ongoing process. Misunderstandings by either side usually stay within reasonable bounds because market reactions provide useful feedback to the authorities, allowing them to correct their mistakes.

Consistent with this, Ahern and Sosyura (2014) find that “fixed exchange ratio bidders dramatically increase the number of press releases disseminated to financial media during the private negotiation of a stock merger, compared to floating exchange ratio bidders, who do not have an incentive to manage their media during the merger negotiation. This effect is associated with short-lived increases in both media coverage and bidder valuation.” Furthermore, they find that floating-exchange rate bidders disseminate more news around the pricing period, perhaps trying to talk up their stock price when it matters the most. Merger Arbitrage Portfolio Portfolio construction is an important part of merger arbitrage. The merger arbitrage manager must decide which merger targets to buy and how to size the positions. To do this, the merger arbitrage manager must first consider the available universe of mergers at any given time.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

Greg Mankiw, the Harvard professor and author of a leading economics textbook, provided a list in his blog a few years back.3 Here are some of the top ones (the numbers in parentheses indicate the percentage of economists who agree with the proposition). 1. A ceiling on rents reduces the quantity and quality of housing available. (93%) 2. Tariffs and import quotas usually reduce general economic welfare. (93%) 3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%) 4. Fiscal policy (for example, tax cuts and/or government expenditure increases) has a significant stimulative impact on a less than fully employed economy. (90%) 5. The United States should not restrict employers from outsourcing work to foreign countries. (90%) 6. The United States should eliminate agricultural subsidies. (85%) 7.


pages: 275 words: 77,017

The End of Money: Counterfeiters, Preachers, Techies, Dreamers--And the Coming Cashless Society by David Wolman

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Bay Area Rapid Transit, Berlin Wall, Bernie Madoff, bitcoin, Bretton Woods, carbon footprint, cashless society, central bank independence, collateralized debt obligation, corporate social responsibility, credit crunch, cross-subsidies, Diane Coyle, fiat currency, financial innovation, floating exchange rates, German hyperinflation, greed is good, Isaac Newton, M-Pesa, Mahatma Gandhi, mental accounting, mobile money, money: store of value / unit of account / medium of exchange, offshore financial centre, Peter Thiel, place-making, placebo effect, Ponzi scheme, Ronald Reagan, seigniorage, Silicon Valley, special drawing rights, Steven Levy, the payments system, transaction costs

“They’re placeholders for favors.” Hub Culture’s currency, Ven, is an attempt to bridge the divide between virtual currencies and real-world goods and services. People in the network transact in the “local” currency, which is priced from a basket of major sovereign currencies, commodities, and carbon futures. Your Ven can be exchanged for one of the major national currencies based on the same floating exchange rates that govern the value of world currencies against one another. Bitcoin has captured peoples’ imaginations because the money supply is determined by an algorithm, not bureaucrats or economists, and there is a cap to the number of Bitcoins that can be created: 21 million. Two related experiments are the Wuffie Bank and Serios. Wuffie has tried to set up a currency based on reputation, as determined by an algorithm that measures the influence we have on others via our social networks.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

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Albert Einstein, Bayesian statistics, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, naked short selling, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

Long Term Capital Management’s strategy was very profitable so long as the market continued on a trajectory that had been maintained ever since the company’s inception. However, in July 1997, a financial contagion began in East Asia and spread around the world. It began when Thailand decided to end the fixed exchange rate regime that had pegged the value of its currency, the baht, to the US dollar. Once it moved to a floating exchange rate regime, the baht depreciated significantly, and its public debt, much of which was denominated in US dollars, ballooned dramatically. The Thai government was unable to meet its ongoing debt obligations and it was technically in default. As a consequence of the default, there was an immediate flight out of the baht and the currencies of other neighboring nations. This capital flight further exacerbated the plunge of the baht and caused currencies in Singapore, Indonesia, Japan, South Korea, and the Philippines to decline as well. 170 The Rise of the Quants These currency flights made imported goods from South-East and South Asian nations more expensive, and hence reduced the volume of commodities they could afford.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

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3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

The euro in this manner is similar to the Gold Standard, which allowed no monetary sovereignty. The decision of a group of developed sovereign countries to revive something akin to a Gold Standard in the twenty-first century requires a bit of explanation. We have to go back to the 1970s when the old Bretton Woods arrangement of fixed exchange rates broke down. Countries were on a de facto flexible or floating exchange rate system. This was a regime for which there were no road maps. Western European countries had previously come together in an arrangement that was called the Common Market (it was later renamed the European Economic Community, EEC). France, the Federal Republic of Germany, Italy, the Netherlands, Belgium and Luxemburg were the original members of what was in effect a customs union. More countries joined the EEC so that by early 1990s there were 15 countries in the European Community/European Union, as it was now labeled.


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

The Response to the Dot-Com Bust After the crash in the NASDAQ index in 2000–2001 and the recession that followed, the Federal Reserve tried to offset the collapse in investment by cutting short-term interest rates steadily. From a level of 6½ percent in January 2001, interest rates were brought down to 1 percent by June 2003. Such a low level, unprecedented in the post-1971 era of floating exchange rates, sent a strong signal to the economy. House purchases picked up as more people found they could afford the lower mortgage payments. Increased housing demand encouraged more home construction, which was already being given a boost by the low interest rates at which developers could borrow. Output growth, riding on productivity growth, was strong, but jobs were really what the public and politicians wanted.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

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affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, women in the workforce, yield curve

FED FUNDS RATE: The short-term interest rate at which US depository institutions lend to each other overnight within the Federal Reserve System. FEEDBACK LOOP: A channel or pathway that is formed by an “effect” returning to its “cause”; it generates either more or less of the same effect. FIAT MONEY: Money that has value solely through governmental decree, not through any intrinsic value or ability to be redeemed for specie or commodity. FLOATING EXCHANGE RATE: When the value of a currency is allowed to fluctuate according to market forces and is not fixed by government entities. FOREIGN DIRECT INVESTMENT: Investment of foreign assets into domestic structures, equipment, and organization. Excludes foreign investment in domestic stock markets. FOREIGN EXCHANGE RESERVES: Liquid assets held by a central bank or government entity that are used to intervene in the foreign exchange market.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

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banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

The liberalisation of global capital markets and the sweeping away of domestic controls over credit enabled global finance a gradual return to the supremacy it had last enjoyed in the nineteenth century. In the post-war era, the international finance industry was a highly regulated system with largely fixed exchange rates and heavy restrictions on capital flows. By the mid-1980s, it was marked by lax regulations on lending, the free mobility of capital and for most countries, freely floating exchange rates. Moreover the other pillars of the market experiment adopted in the US and the UK—the weakening of unions, the axing of business regulations and the switch from maintaining employment to fighting inflation—also served to re-concentrate power in the hands of the leaders of the global finance industry. Nowhere was this dismantling of the post-war financial and state economic apparatus more welcome than in the offices of the City, Wall Street and the other financial centres.


pages: 357 words: 99,684

Why It's Still Kicking Off Everywhere: The New Global Revolutions by Paul Mason

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back-to-the-land, balance sheet recession, bank run, banking crisis, Berlin Wall, capital controls, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, creative destruction, credit crunch, Credit Default Swap, currency manipulation / currency intervention, currency peg, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, Francis Fukuyama: the end of history, full employment, ghettoisation, illegal immigration, informal economy, land tenure, low skilled workers, mass immigration, means of production, megacity, Mohammed Bouazizi, Naomi Klein, Network effects, New Journalism, Occupy movement, price stability, quantitative easing, race to the bottom, rising living standards, short selling, Slavoj Žižek, Stewart Brand, strikebreaker, union organizing, We are the 99%, Whole Earth Catalog, WikiLeaks, Winter of Discontent, women in the workforce, working poor, working-age population, young professional

It was Ben Bernanke’s book on the Great Depression that taught us the monetarist truism: ‘To an overwhelming degree the evidence shows that countries that left the Gold Standard recovered from the Depression more quickly than countries that remained on gold.’23 The lesson is this: he who devalues his currency first escapes the crisis first. In the 1930s, tight monetary policy, driven by adherence to gold, exacerbated the depression. This time there is no Gold Standard, but a system of free-floating exchange rates. Britain was first out of the blocks to devalue—the governor of the Bank of England, Mervyn King, told colleagues privately that he was proud of his contribution to the 20 per cent slide of sterling after 2008. America launched an effective devaluation strategy with QEII, despite simultaneously claiming to be for ‘a strong dollar’. Then, during the desperate flight to safety in August 2011, when both America and the eurozone toyed with default, others piled into the currency game: Switzerland and Japan sold mountains of money to try and depreciate their own currencies.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

To prevent these flows interfering with the fixed exchange rates, the UK used a combination of capital controls (to limit the outflows due to the acquisition of foreign assets), quantitative and qualitative restrictions on bank lending, and control of interest rates (to limit the availability and demand for domestic credit which could fuel imports). Despite the huge government deficits run up during the war, the destruction of large swathes of Europe, and a highly repressed financial system, from 1945 to 1971 growth was uniformly high and unemployment very low. For these reasons this period is commonly referred to as the golden age of capitalism. Floating exchange rates Between 1945 and 1971 a new dynamic developed. By international agreement, oil had always been priced in US dollars and as a consequence the oil exporting nations of the Middle East had amassed a substantial surplus of dollars, invested mainly in US Government securities (bonds). By 1965, the French President, Charles de Gaulle, was decrying the world’s dependence on the US dollar and calling for a return to a national gold standard, and in 1971 Switzerland and France each demanded redemption in gold of its central bank’s holdings of dollars.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

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affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, endogenous growth, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, labour market flexibility, labour mobility, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

Alas, they were. The missing ingredients would be brought into the picture much later as the problems of free finance became more apparent. The painful lessons of the interwar period would have to be relearned. Currency floating, in particular, worked very differently from what most economists expected at the time. By the 1980s, “excessive volatility” and “misalignment” had become bywords for floating exchange rates. As these pieces of economist’s jargon suggest, there were two problems: currency values fluctuated too much on a day-to-day basis; and there were prolonged periods of currency under-or overvaluation that created difficulties at home and for trade partners. Consider the travails of the British pound. We have historical data on the value of the pound against the U.S. dollar back to 1791 that provide us with a long historical perspective on currency instability.

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

One possibility would be to take lessons from the 1980s Savings and Loan crisis in the US, where bad debts were ultimately bundled up into the Resolution Trust Corporation. Admittedly, the establishment of a eurozone ‘bad bank’ would leave eurozone taxpayers to pick up the 238 4099.indd 238 29/03/13 2:23 PM Avoiding Dystopia bill. That, however, would be small price to pay if, as a result, nations within the single currency were then able to thrive: far better to have orderly losses than a catastrophic collapse. DEALING WITH DEBT: COUNTRIES WITH FLOATING EXCHANGE RATES The great advantage of an independent monetary policy is the ability to delay until tomorrow what might otherwise be necessary today. It’s easy enough, for example, to see that the US, the UK and Japan – all of which have ropey fiscal positions, at least judged by post-­war standards – have been under no real pressure to deliver austerity with the savage urgency required of nations in southern Europe.

Rogue States by Noam Chomsky

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anti-communist, Asian financial crisis, Berlin Wall, Branko Milanovic, Bretton Woods, capital controls, collective bargaining, colonial rule, creative destruction, cuban missile crisis, declining real wages, deskilling, Edward Snowden, experimental subject, Fall of the Berlin Wall, floating exchange rates, labour market flexibility, labour mobility, land reform, liberation theology, Mikhail Gorbachev, Monroe Doctrine, new economy, oil shock, RAND corporation, Silicon Valley, strikebreaker, structural adjustment programs, Tobin tax, union organizing, Washington Consensus

That’s what many economists call the “golden age” of modern capitalism (modern state capitalism, more accurately). That was a period, roughly up until about 1970, a period of historically unprecedented growth of the economy, of trade, of productivity, of capital investment, extension of welfare state measures, a golden age. That was reversed in the early ‘70s. The Bretton Woods system was dismantled, with liberalization of financial markets and floating exchange rates. The period since has often been described as a “leaden age.” There was a huge explosion of very short-term, speculative capital, completely overwhelming the productive economy. There was marked deterioration in just about every respect—considerably slower economic growth, slower growth of productivity, of capital investment, much higher interest rates (which slow down growth), greater market volatility, and financial crises.


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

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Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, California gold rush, Carmen Reinhart, central bank independence, commoditize, conceptual framework, corporate governance, corporate raider, creative destruction, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, Paul Samuelson, payday loans, Plutocrats, plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

Only a month after President Nixon announced his trip to China, he went on national television, announced that the United States was in the worst crisis since the Great Depression, and took the dollar off the gold standard. Nixon effectively devalued the U.S. currency for the second time in 40 years.28 In 1971 Nixon unilaterally ended the gold convertibility of the dollar, bringing an end to the Bretton Woods system of managed currencies and ushering in a period of floating exchange rates. Taking a page out of the Democratic playbook of Truman and FDR, Nixon also imposed a 90-day freeze on wages and prices and a 10 percent surcharge on imports. Following the Kennedy–Johnson administration in the United States, there was a massive effort to manage the marketplace, in part by controlling wages. In their book The Commanding Heights, Daniel Yergin and Joseph Stanislaw described the bizarre fact of Richard M.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Cross-border movements of private capital were "driven to an important extent by expectations of exchange rate realignments," themselves driven largely by current-account considerations. Deficit countries, then, typically faced outflows, as capital tried to beat a coming devaluation; surplus countries faced inflows, as investors hoped to benefit from the likely revaluation. With the advent of floating exchange rates in 1973, these tendencies were only reinforced. Margaret Thatcher's prompt removal of exchange controls upon her ascension in 1979 set the tone for the 1980s. Ten years later, none of the major and few of the minor rich industrial countries significantly restricted the right of their citizens to hold foreign property. As Turner noted, things were very different the last time capital roamed the globe so freely.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

A currency peg can mean higher volatility in short-term interest rates, as the central bank seeks to keep the price of its money steady in terms of the peg. It can mean deflation, if the supply of the peg is constrained (as the supply of gold was relative to the demand for it in the 1870s and 1880s). And it can transmit financial crises (as happened throughout the restored gold standard after 1929). By contrast, a system of money based primarily on bank deposits and floating exchange rates is freed from these constraints. The gold standard was a long time dying, but there were few mourners when the last meaningful vestige of it was removed on 15 August 1971, the day that President Richard Nixon closed the so-called gold ‘window’ through which, under certain restricted circumstances, dollars could still be exchanged for gold. From that day onward, the centuries-old link between money and precious metal was broken.


pages: 497 words: 143,175

Pivotal Decade: How the United States Traded Factories for Finance in the Seventies by Judith Stein

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1960s counterculture, affirmative action, airline deregulation, anti-communist, Ayatollah Khomeini, barriers to entry, Berlin Wall, blue-collar work, Bretton Woods, capital controls, centre right, collective bargaining, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, desegregation, energy security, Fall of the Berlin Wall, falling living standards, feminist movement, financial deregulation, floating exchange rates, full employment, Gunnar Myrdal, income inequality, income per capita, intermodal, invisible hand, knowledge worker, laissez-faire capitalism, liberal capitalism, Long Term Capital Management, manufacturing employment, market bubble, Martin Wolf, new economy, oil shale / tar sands, oil shock, open economy, Paul Samuelson, payday loans, post-industrial society, post-oil, price mechanism, price stability, Ralph Nader, RAND corporation, reserve currency, Robert Gordon, Ronald Reagan, Simon Kuznets, strikebreaker, trade liberalization, union organizing, urban planning, urban renewal, War on Poverty, Washington Consensus, working poor, Yom Kippur War

Without growth, unemployment could not be reduced—the very reason that, unlike the United States, Germany and other European countries and Japan employed industrial policies and kept out goods from developing nations. The U.S. trade deficit jumped from $9.5 billion in 1976 to $31.1 billion in 1977 and $34 billion in 1978, despite a cheaper dollar.5 The increased openness of the U.S. economy—integrated finance, floating exchange rates, global trade, unencumbered capital flows—reduced the potency of Keynesian policies on the domestic economy. Some portion of the U.S. stimulus stimulated foreign economies. The United States was left with budget deficits, inflation, and rising imports. When imports flooded the U.S. market as a result of these policies, government blamed industry. Critics claimed that high prices and high wages made domestic goods uncompetitive and caused inflation.


pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

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Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, Bretton Woods, capital controls, clean water, collateralized debt obligation, commoditize, corporate raider, credit crunch, David Ricardo: comparative advantage, debt deflation, deindustrialization, delayed gratification, disintermediation, diversification, fiat currency, financial independence, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global supply chain, God and Mammon, happiness index / gross national happiness, hydraulic fracturing, informal economy, invisible hand, Jane Jacobs, land tenure, land value tax, Lao Tzu, liquidity trap, lump of labour, McMansion, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, off grid, oil shale / tar sands, Own Your Own Home, Paul Samuelson, peak oil, phenotype, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail

When local government is the issuer, scrip much more easily takes on the “story of value” that makes it into money. Such currencies are often called complementary because they are separate from, and complementary to, the standard medium of exchange. While they are usually denominated in dollar (or euro, pound, etc.) units, there is no currency board that keeps reserves of dollars to maintain the exchange rate. They are thus similar to a standard sovereign currency with a floating exchange rate. In the absence of local government support, because complementary fiat currencies are not easily convertible into dollars, businesses are generally much less willing to accept them than they are proxy currencies. That is because in the current economic system, there is little infrastructure to source goods locally. Locally owned businesses are plugged into the same global supply chains as everyone else.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

By the early 1990s, the finance industry as a whole was generating over 6.5% of economic output, while Wall Street’s share of GDP had tripled to around 1%. Wall Street was still a minor player in the scheme of things, but a feisty one, a growing one. No other sector had grown at that rate. Even the computer industry, in the age of the PC and the mass-produced silicon chip, had not grown that fast. That turbocharged growth was fueled by two principal ingredients. First, the advent of floating exchange rates in 1971 had gradually led to the dismantling of international controls on the movement of capital. As capital started to become ever more mobile, Wall Street firms were ideally placed to skim a little froth from the river of money as it passed on through.2 Secondly, Wall Street had perfected the art of ‘disintermediation.’ The term is ugly and obscure, but its meaning is startlingly simple.


pages: 497 words: 153,755

The Power of Gold: The History of an Obsession by Peter L. Bernstein

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Albert Einstein, Atahualpa, Bretton Woods, British Empire, California gold rush, central bank independence, double entry bookkeeping, Edward Glaeser, falling living standards, financial innovation, floating exchange rates, Francisco Pizarro, German hyperinflation, Hernando de Soto, Isaac Newton, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, large denomination, liquidity trap, long peace, money: store of value / unit of account / medium of exchange, old-boy network, Paul Samuelson, price stability, profit motive, random walk, rising living standards, Ronald Reagan, seigniorage, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route

New York: Holt Rinehart. Wheatcroft, Geoffrey, 1985. The Randlords. London: Atheneum. White, Michael, 1977. Isaac Newton: The Last Sorcerer. Reading, MA: AddisonWesley. Wilkie, A. D., 1994. "The Risk Premium on Ordinary Shares." A presentation to the Faculty of Actuaries and the Institute of Actuaries, London. Wimmer, Larry, 1975. "The Gold Crisis of 1869: Stabilizing or Destabilizing Speculation Under Floating Exchange Rates." Explorations in Economic History, 12, pp. 105-122. Wirth, Max, 1893. "The Crisis of 1890."Journal of Political Economy, 1, no. 2, pp. 214-235. Wright, Louis B., 1970. Gold, Glory, and the Gospel: The Adventurous Lives and Times of the Renaissance Explorers. New York: Atheneum. -A New History of Rome," Spectator 102 (January 2, 1909), pp. 20-21. 'Where in the world did the Pharaoh of Egypt obtain a bear, much less a polar bear, over two hundred years before the birth of Christ?


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population, zero-sum game

The controls will be slowly lifted for individuals, but Iceland will need tools to control the potential outflow. The ultimate tool for Júlíusdóttir was to join the European Union and the Eurozone, but after losing the April 2013 general election, this seemed off the agenda. In the absence of the EU option, other economic thinkers on the island think that the way forward for a small open economy like Iceland is to copy the Asian countries. Iceland should have a managed floating exchange rate, and a large build-up of foreign-exchange reserves. ‘It has served the Asians well,’ says Guðmundsson at the Central Bank. So that’s an end to inflation targeting, and for the banks an end to the European single market. A single market without a single safety net in banking was one of the causes of Iceland’s excess. ‘All of this was nonsense because there’s a huge difference between growing tomatoes or making shoes and banking.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

With the exception of cases where companies are about to be merged or otherwise removed from trading, the stock market is made up of securities conspicuously lacking in expiration dates. So how was it again that arbitrageurs are supposed to force stock prices back into line in the short term? Nobody had a good answer. Believers in the rational market often cited Milton Friedman’s 1951 plea for floating exchange rates or the 1950 paper by UCLA’s Armen Alchian that said inept economic actors would be weeded out by a Darwinistic process. Irrational traders would lose money and disappear from the scene, the thinking went, to be supplanted by rational ones. But this claim was basically just folklore. No one had ever offered a scientific explanation—let alone evidence—of how arbitrage was supposed to work on a market-wide scale.


pages: 264 words: 115,489

Take the money and run: sovereign wealth funds and the demise of American prosperity by Eric Curt Anderson

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asset allocation, banking crisis, Bretton Woods, business continuity plan, business intelligence, business process, collective bargaining, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, diversified portfolio, fixed income, floating exchange rates, housing crisis, index fund, Kenneth Rogoff, open economy, passive investing, profit maximization, profit motive, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, sovereign wealth fund, the market place, The Wealth of Nations by Adam Smith, too big to fail, Vanguard fund

According to Dooley, Folkerts-Landau, and Garber, “the periphery countries chose a development strategy of undervalued currencies, controls on capital flows, trade reserve accumulation, and the use of the [core] as a financial intermediary that lent credibility to their own financial systems. In turn, the U.S. lent long term to the periphery, generally through foreign direct investment.”16 As Dooley, Folkerts-Landau, and Garber understood economic history in 2003, the collapse of Bretton Woods I was the result of growing prosperity in Europe and Japan. However, they go on to argue that the subsequent period of free-floating exchange rates was “only a transition during which there was no important [economic] periphery.”17 (As Dooley, Folkerts-Landau, and Garber put it, “the communist countries were irrelevant to the international monetary system.”) Europe and Japan, Dooley, Folkerts-Landau, and Garber contend, have now been replaced by an “Asian periphery” that is proceeding down the same path as their predecessors in Berlin, Paris, and Tokyo.


The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, distributed ledger, diversification, double entry bookkeeping, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, labour market flexibility, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

Unlike gold and silver, this form of money was based on an understanding that the currency held by a person could be redeemed for a commodity in exchange. As the century rolled on it was this form of money that evolved into fiat money, which is currently used by modern economies. Fiat currencies came into use in 1971 following the decision of President Nixon to discontinue the use of the gold standard. The end of the gold standard helped sever the ties between world currencies and real commodities and gave rise to the floating exchange rate. A distinguishing feature between commodity-backed currencies and fiat currencies, however, is the fact that it is based on trust and not a tangible value per se. Fiat currency is backed by a central or governmental authority and functions in purpose as a legal tender that it will be accepted by other people in exchange for goods and services. It can be looked as a type of IOU, but one that is unique because everyone who uses it trusts it.


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, Bretton Woods, business climate, capital controls, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, corporate governance, creative destruction, crony capitalism, decarbonisation, deindustrialization, demographic dividend, demographic transition, Doha Development Round, eurozone crisis, facts on the ground, failed state, financial intermediation, financial repression, first-past-the-post, floating exchange rates, full employment, germ theory of disease, Gini coefficient, global supply chain, global value chain, hiring and firing, income inequality, Indoor air pollution, Induced demand, inflation targeting, invisible hand, land reform, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price mechanism, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, race to the bottom, randomized controlled trial, rent-seeking, reserve currency, rising living standards, school choice, school vouchers, secular stagnation, Silicon Valley, smart cities, South China Sea, special drawing rights, The Future of Employment, The Market for Lemons, too big to fail, total factor productivity, trade liberalization, transaction costs, universal basic income, urban sprawl, working-age population

Then, strong inward capital flows resumed because a) it looked as if the worst of the crisis was over and India had come out of it in better shape than many countries; and b) Western governments slashed interest rates to very low levels and started ‘quantitative easing’, which raised the relative return on Indian assets. At this point, Subbarao appears to have had a change of heart. Perhaps he thought that a stronger rupee would be good for damping down inflation. Perhaps he was persuaded by the reports of some government committees that had advocated moving towards a floating exchange rate. He turned away from Reddy’s strategy of managing the rupee and allowed the exchange rate to be market-​determined. In 12 months from April 2009, the rupee rose from $1 = Rs. 51 to $1 = Rs. 45, and remained around that level for another year. But Indian inflation was much faster than in other countries. The combined result of these two factors was that India’s export competitiveness against its trading partners worsened sizeably.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Meriwether, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

He wrote that Volcker’s harder-nosed monetarist approach was more or less dictated by the advisory group of bankers who met with the Fed regularly. Greider, Secrets of the Temple, p. 145. 12 OVERSIMPLIFICATION WAS PRECISELY WHY: Volcker later wrote, with what became characteristic ambiguity, “I was as skeptical of the extreme claims of that school about the virtues of constant money growth as I had been about the efficacy of floating exchange rates.… But shorn of some of those extreme claims, the approaches that had been debated (and half forgotten) seemed worth looking at again.” Volcker and Gyohten, Changing Fortunes, p. 167. 13 IN THE SAME BROOKINGS DISCUSSION: Volcker, “Monetary Policy,” in Feldstein, ed., American Economic Policy in the 1980s, p. 160. 14 VOLCKER FACED A DIFFICULT TASK: Greider, Secrets of the Temple, p. 105. 15 VOLCKER RETURNED EARLY: Schmidt and others wanted higher rates in the United States partly because the value of the U.S. dollar was falling against their currencies, reducing their exports to the U.S. 16 THE MONEY SUPPLY GREW MORE SLOWLY: There is typically a lag, but its duration is debatable. 17 “THE OCTOBER [1979] SPURT”: Greider, Secrets of the Temple, p. 140. 18 THE CREDIT CONTROLS WERE STRONGLY SUPPORTED: W.


pages: 843 words: 223,858

The Rise of the Network Society by Manuel Castells

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Apple II, Asian financial crisis, barriers to entry, Big bang: deregulation of the City of London, Bob Noyce, borderless world, British Empire, capital controls, complexity theory, computer age, computerized trading, creative destruction, Credit Default Swap, declining real wages, deindustrialization, delayed gratification, dematerialisation, deskilling, disintermediation, double helix, Douglas Engelbart, Douglas Engelbart, edge city, experimental subject, financial deregulation, financial independence, floating exchange rates, future of work, global village, Gunnar Myrdal, Hacker Ethic, hiring and firing, Howard Rheingold, illegal immigration, income inequality, Induced demand, industrial robot, informal economy, information retrieval, intermodal, invention of the steam engine, invention of the telephone, inventory management, James Watt: steam engine, job automation, job-hopping, John Markoff, knowledge economy, knowledge worker, labor-force participation, labour market flexibility, labour mobility, laissez-faire capitalism, Leonard Kleinrock, low skilled workers, manufacturing employment, Marc Andreessen, Marshall McLuhan, means of production, megacity, Menlo Park, moral panic, new economy, New Urbanism, offshore financial centre, oil shock, open economy, packet switching, Pearl River Delta, peer-to-peer, planetary scale, popular capitalism, popular electronics, post-industrial society, postindustrial economy, prediction markets, Productivity paradox, profit maximization, purchasing power parity, RAND corporation, Robert Gordon, Robert Metcalfe, Shoshana Zuboff, Silicon Valley, Silicon Valley startup, social software, South China Sea, South of Market, San Francisco, special economic zone, spinning jenny, statistical model, Steve Jobs, Steve Wozniak, Ted Nelson, the built environment, the medium is the message, the new new thing, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, transaction costs, urban renewal, urban sprawl, zero-sum game

For the first time in history, a unified global capital market, working in real time, has emerged.16 The explanation, and the real issue, of the phenomenal volume of trans-border financial flows, as shown in chapter 2, lies in the speed of the transactions.17 The same capital is shuttled back and forth between economies in a matter of hours, minutes, and sometimes seconds.18 Favored by deregulation, disintermediation, and the opening of domestic financial markets, powerful computer programs and skillful financial analysts/computer wizards, sitting at the global nodes of a selective telecommunications network, play games, literally, with billions of dollars.19 The main card room in this electronic casino is the currency market, which has exploded in the past decade, taking advantage of floating exchange rates. In 1998, US$1.3 trillion were exchanged every day in the currency market.20 These global gamblers are not obscure speculators, but major investment banks, pension funds, multinational corporations (of course including manufacturing corporations), and mutual funds organized precisely for the sake of financial manipulation.21 François Chesnais identified about 50 major players in the global financial markets.22 Yet, as argued above, once turbulences are generated in the market, flows take over, as central banks have repeatedly learned to their heavy cost.